I was talking to a colleague the other day about how the economic challenges faced by both healthcare delivery systems and their vendors may actually create the impetus we need to better align goals across the supply chain. Misaligned incentives have been a major factor in the historic lack of trust between providers and suppliers, which has hampered their ability to lower the cost of doing business together and, in turn, the cost of healthcare. Unfortunately, Wall Street’s almost myopic focus on top-line growth could impede efforts by many healthcare suppliers to make the kinds of changes I believe are needed to position them for success in an era of healthcare reform.
Given the need to control escalating healthcare costs, both hospitals and suppliers will have a harder time growing revenue. After all, healthcare just can’t afford to do more and charge more, especially with many of the provisions of healthcare reform designed to reduce the number of unnecessary procedures, which can impact the amount of supplies consumed. And with lower reimbursements soon to be a fact of life, hospitals will be hard pressed to pay more for products, unless they are proven to lower hospital acquired infections, readmissions, and other factors influencing reimbursement levels. Instead, healthcare systems and their vendors will need to focus more on bottom-line growth, which can be achieved through better operational performance.
A great place to start is the supply chain, which can only be fully optimized when both the buy and sell side of the equation work together. For this reason, I believe, hospitals and suppliers may have more in common than ever before. But here’s the rub: Wall Street hasn’t gotten the message. It’s still focused on top-line growth, with little regard for margins, which creates a disincentive for suppliers to change how they do business.
Take the case of one publicly traded healthcare supplier: One of its senior executives told me that the company recently experienced a year of flat revenue, but because it was able to lower its operational costs, its margins went up. Despite this seemingly good performance, the stock went down. By contrast, during another year, when revenues were up but margins down, the stock price went up. Given the economic realities of our current healthcare crisis, I wonder whether Wall Street, at least when it comes to healthcare, might need to adjust its focus.