Market Insight

Are services the key to sustained profits?

February 06, 2017

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The decline in average selling prices of X-ray equipment is nothing new. As a technology matures, and products using it are manufactured in larger quantities, they cost less to produce. In addition, more suppliers entering the market push prices down; also, intense cost pressure from healthcare purchasers have contributed to lower average selling prices. However, this trend is continuing and intensifying with sustained limitations on healthcare budgets and restrictions on healthcare spending. Healthcare providers must balance meeting financial targets with providing high quality care to patients, whilst manufacturers must offer products at suitable prices, whilst remaining profitable; the market is reaching a breaking point.

Manufacturers of X-ray systems are facing increased competition in each of the deals they are entering, with prices of equipment declining up to 15% year-on-year for some products. Additionally, healthcare facilities are requesting to purchase under operational budgets, rather than as capital purchases. As a result, vendors must be more creative in their strategy and more flexible in their approach in order to be considered for deals and remain competitive.

The hardware of X-ray systems is the most affected the price decline; some components, such as flat panel detectors, are becoming commoditised. It is getting more difficult for manufacturers to gain a profit from these hardware products, resulting in other profitable options being explored. One such option is that of services. Services can include installation of the X-ray systems, ongoing maintenance of the equipment, and can even cover replacing dropped and broken flat panel detectors.    

One service opportunity of particular interest is that of consulting. As healthcare facilities are seeking to reduce their total costs, improve efficiency and increase patient throughput, there is an increasing occurrence of vendors partnering with hospitals. Through such partnerships, suppliers are offering holistic consulting services and advice to highlight potential inefficiencies and cost saving opportunities. A number of large multi-national manufacturers are offering complete solutions, including asset management, to hospitals. This includes an in-depth consulting process in which the vendor will assess the hospital’s existing equipment and current processes, and work with the hospital on how it can improve their workflows, ultimately resulting in cost savings. Examples include determining if a facility will get a better return on investment (RoI) if it retrofits an existing X-ray system, or if it replaces this system with a new installation.

There are three key challenges that vendors must face as part of hospital-vendor partnership services. First, there is a certain level of risk that manufacturers must consider and take responsibility for. As part of the relationship, vendors must commit that their products and services will allow the hospital to meet certain numerical metrics for payment to be made. Such metrics are based on improving efficiency, increasing patient through-put, and reducing overall costs, whilst maintaining a good level of patient care. To minimise the risk, vendors must ensure that they have a comprehensive understanding of the facilities they are partnering with; and be able to adapt to different hospital environments to succeed as part of a consulting partnership. Second, vendors must be aware of the required infection control documentation when servicing different brands of equipment. Standards for the associated records that must be kept are tightening and must be considered by suppliers offering maintenance servicing. Third, the level of success that manufacturers experience from services will depend on the route to market that they use. Vendors that sell direct, rather than through distributors, will be more profitable in the  services sector.

Ultimately, more attention is being placed on services as an alternative source of revenue for manufacturers. As the average selling prices of hardware are continuously pushed down, service revenue streams are becoming more important for vendors to remain profitable. As this trend continues, services will ultimately account for more revenues than hardware, although it is difficult to determine exactly when this will be. Large vendors with extensive installed bases and that can be flexible in their strategy will be most successful in sustaining profits in the challenging healthcare environment.   

Research by Market
Healthcare Technology
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