5 Key Concepts from the William Blair & Company Survey of Hospital Administrators

This article briefly highlights five concepts from the William Blair & Company survey of hospital administrators. The survey included discussions with 27 administrators and 10 senior executives and specifically focused on capital spending and the impact on companies such as Intuitive Surgical (the DaVinci Robotic), Stryker Corp. and TomoTherapy (linear accelerators). The report was issued on Dec. 3. The report was extremely informative and intelligently done.

1. Overall hospital conditions. Hospital executives generally expect their patient volumes to be flat to slightly higher next year but see revenues dropping. They also expect that, as unemployment rates rise, more patients will stretch out payments, seek care under Medicaid and defer elective procedures. Hospital funding is also being constrained by the higher cost of borrowing, losses in investment portfolios and a significant slowing in charitable donations.

The interviews further indicated that patient volumes through this year are not down but generally remain solid. However, hospitals have seen declines in collections and an increase in bad debt. They are also seeing payors slowing down their payments as well.

William Blair found that inpatient procedures are not nearly as exposed to the slowdown as outpatient cases. Many places have seen essentially no decline in inpatient procedures. However, some are seeing some reductions in outpatient procedures. Specifically, the survey results also noted that procedures outside cancer, cardiology, imaging, pulmonary and critical care and neurosciences are being deferred. The largest slowdowns are being seen in both cosmetic surgery (plastic surgery) and the second most common procedures experiencing slowdown were orthopedic procedures. Here, the belief is that these procedures are ultimately going to be done but that (1) the co-pays may be leading people to delay their procedures or (2) certain people may delay procedures for concern of losing their jobs and insurance.

Hospitals are also seeing an increase in the number of Medicaid patients. This is problematic in that the payments for Medicaid are significantly lower than for commercial payors and Medicare patients. The increased amount of the patient portfolio on Medicaid will cause challenges for facilities.

2. Capital spending. Capital spending is likely to decline and the biggest areas of decline will be larger capital expenditures ($3 million to $5 million and above) and planned facility expansions.
Many hospitals will continue to spend for revenue generating equipment such as linear accelerators (radiation therapy) and technologies for robotic surgery. However, many hospitals will delay these purchases due to the credit environment.

Some hospitals noted renewed efforts at cost containment. However, they see less ability to utilize GPOs effectively where they are working with large ticket devices and implants that are less commodity type products.

3. Stryker. The core concepts discussed as to Stryker are essentially that the company is an extremely healthy company but may face challenges as orthopedic procedures begin to decelerate because patients fear being away from work for extended periods of times or cannot afford the required deductible or co-pays.

William Blair’s long term view on Stryker’s value as a diversified high-quality medical technology company has not changed. With that stated, about 41 percent of Stryker’s business is med-surg and of this 60 percent is related to capital purchases. In the third quarter, Stryker did not report any slowing in orthopedic implant procedure growth rates. William Blair still believes that Stryker deserves an “outperform” rating.

4. TomoTherapy. William Blair believes that the demand for linear accelerators remains strong but purchases may be delayed next year due to the difficult lending environment. Moreover, an increasing amount of the linear accelerators being purchased are the “hi-art” accelerators which are priced at about $2.7 million versus the more expensive linear accelerators.

With further respect to TomoTherapy, William Blair indicated that average selling price for the hi-art system is about $2.7 million. Here William Blair notes that in this environment, financing may be more difficult to come by for TomoTherapy’s for-profit customers and large hospitals are likely to delay purchases to preserve cash. It also stated that single linear accelerator centers, which account for more than 50 percent of the cancer centers in the United States, are likely to find hi-art much more appealing due to its costs. It also states and believes that radiation and oncology will remain an important revenue generating component for hospitals. Here, it states that the typical break even for a linear accelerator is 12 to 18 months on a $3 million.

5. Intuitive Surgical. William Blair continues to see Intuitive Surgical’s Da Vinci as transformational technology. However, the cost of the unit at approximately $1.35 million, together with the fact that many surgeons have not started using it as commonly as ultimately expected, and certain other factors will likely lead to a slowdown on the purchases of the Da Vinci robotic technologies for next year. Certain of the comments related to the Da Vinci system are as follows: The system is very good; the equipment has not generated the expected profitability and procedure volume; you have to have surgeons who are trained on it and fully committed to using it; more and more surgeons are starting to use it; the timing of a purchase is underdetermined at this point. The slowing down of purchases of the Da Vinci robotic system has led to a reduced William Blair system placement estimate for 2009 from 425 to 350 systems which is down from 2008.