Dramatic changes in the health care industry have had a significant impact on the medical device sector. Access to health care is more available than ever, health care costs have grown at a rapid pace, and governments and corporations are under intense pressure to contain fees. Those factors, combined with the amount of data that hospitals and large medical buying groups are able to capture and visualize, have led to pricing pressures on medical devices and drugs. Companies have responded by seeking solutions that reduce patient costs while minimizing the impact on the selling prices of their products. CFOs in the medical device space must make key financial decisions amid this evolving environment of activity and innovation.
These were some of the takeaways from a conversation with Bill Jellison, the former senior vice president and CFO at Stryker Corporation, a leading global provider of medical devices and equipment. Bill has extensive experience in areas of international finance, including accounting, planning and analysis, SEC reporting, acquisitions valuations, internal audit, tax and treasury. He also served as senior VP and CFO at Densply, the world’s largest manufacturer of professional dental products and technologies, and at Donnelly Corp., as VP of finance, treasurer and corporate controller. He has served on the board of directors at PolyOne Corp., a global provider of specialized polymer materials, services and solutions, and Young Innovations, a private equity owned dental products manufacturer. He is a senior adviser and consultant for the med-tech and dental industries.
Some of Bill’s insights:
- Health care providers are like mini-manufacturing centers, with some of the same methods and tools of manufacturing relevant for hospitals as they seek to minimize costs and improve the quality of care.
- Acquisitions remain a key growth strategy, yet they must be done properly to ensure real value is created and successful integration is achieved, as those components make a company great.
- Strong business models require appropriate and understandable strategic plans that are clearly communicated and embraced by all functional leads.
- To encourage the best in people, CFO-s must cultivate an open door policy not only to core team members but in all divisions and locations around the world.
Here are more thoughts from the interview.
Grant Thornton: How have changes in health care impacted strategies for medical device companies?
“For a hospital or surgery center to become a center of excellence today, or a preferred provider, minimizing costs must be combined with improving the quality of care.”Bill Jellison:
For a hospital or surgery center to become a center of excellence today, or a preferred provider, minimizing costs must be combined with improving the quality of care, which includes reduced infection rates, better patient outcomes and shorter recovery periods. There are a number of technology innovations in navigation, robotic-assisted surgery, and 3D-printed components, really still in their infancy, that are and continue to be a primary focus of innovation efforts.
Grant Thornton: Any industry facing the level of change that health care is has the challenge of where to put the extra dollar. What advice would you give to health care CFOs in that regard?
There’s no question the dollars should first go into the organization to build and ensure a robust and efficient manufacturing logistics regulatory process and investments in new product innovation. Those investments have high payback and strengthen the foundation of the company, benefiting employees, associates and outside investors.
Grant Thornton: Technology and data analytics are playing a key role in changing the business model for health care. What role does the CFO play in this change?
A CFO really needs to ensure that proper strategic plans are created, clearly communicated, and vetted and committed to by primary functional leads. Annual budgets must stay on track and support the strategic plan – and everybody must understand not only what the plan is but what their role is in its success. The plan also requires solid measurable results to help visualize it and ensure accountability.
Grant Thornton: Developing medical devices takes years of work and a heavy upfront investment before a company realizes any profit. What do you see as the capital-raising environment in the next few years, and what’s your sense of ways to share some of the risk?
Funds are clearly available within this [medical device] space, which has been relatively stable even in some difficult economic periods. We’ve had a long history of strong margins and profitable performance. Even a good-sized company that has leveraged up with a significant acquisition should still go out and do the next large or mid-sized acquisition if it has the kind of management strength and capabilities to pull that off. Partnerships may make good sense in terms of structure, where players bring different opportunities and capabilities.
Grant Thornton: Partnerships raise cybersecurity risks, particularly when more medical devices and the Internet of Things are connected to provide feedback loops and information people want. With all the cyber-threats that exist today, what should companies in this industry be doing to protect themselves?
“The rapid pace of change and new methods of attack are definitely a challenge whether you are large or small. I think the key is to make sure your company has secure platforms or servers in place and actively tests and probes potential access points.”Bill Jellison:
The rapid pace of change and new methods of attack are definitely a challenge whether you are large or small. I think the key is to make sure your company has secure platforms or servers in place and actively tests and probes potential access points. You need to ensure you have a robust supplier qualification review process, and that suppliers and partners also have protected systems. Any connectivity between the data in your system and theirs should be protected and access points tightly controlled.
Grant Thornton: How does a CFO balance the need for investment in technological advancements with a need to focus on cost reductions?
The CFO plays a lead role in making sure cost reduction is constantly encouraged throughout the organization. Cost containment is being driven everywhere, from procurement areas to salary and commission structures to functional structures. It’s important that the dollars derived are partially or fully reinvested in the organization to drive future opportunities. Employees need to understand the benefits of the process, which generates additional resources to drive success and long-term viability.
Grant Thornton: Companies can learn a lot from peers outside their industry. In your experience, are there lessons health care providers can learn from manufacturers in terms of being more lean and efficient while improving quality?
I do think most health care providers or hospitals are like mini manufacturing centers. They’re already using process improvement tools and techniques in their internal processes, cost of care management processes, and procedures.
Many third-party groups are providing visibility of data to hospitals to create insights into the practices of other hospitals and surgery centers, which ultimately improves long-term outcomes and efficiencies.
For example, a small hospital or surgery center has its knowledge base tied up with a small, tight team, and information provided by third parties raises awareness that procedures can be done differently. Just as lean manufacturing helped manufacturers do things in a way different from 10 or 20 years ago, so that visibility and use of data can help influence hospitals to make changes to improve their overall costs and quality of care.
“Similarly to how robotics improve manufacturing operations, health care providers are finding that robotics in surgical procedures are helping to ensure consistency and repeatability in specific operations, and help to minimize tissue damage and reduce recovery time.”
Similarly to how robotics improve manufacturing operations, health care providers are finding that robotics in surgical procedures are helping to ensure consistency and repeatability in specific operations, and help to minimize tissue damage and reduce recovery time. It’s that kind of quality of care -- that “center of excellence” title -- that hospitals are looking to achieve. They want to be places that companies or governments are referring patients to.
Grant Thornton: What have been the most pressing issues you’ve faced as a CFO?
At the end of the day, it’s all about prioritizing and focusing on areas that create value. An area with big payoffs would be acquisitions -- challenging and probing all the assumptions that go into them, the integration process, the timing of activities, and ensuring synergistic opportunities are truly delivered in a timely fashion and that you have the resources to bring the deal synergies to fruition as quickly as possible.
And then there are the typical administrative burdens and meetings that drive some people crazy. You need to minimize the time spent in those areas when there is truly no value or any actionable items coming out of them.
Grant Thornton: Talent is a critical component in the health care industry. Can you comment on a CFO’s role in fostering a climate and culture that contribute to employee satisfaction and retention?
CFOS need to cultivate participative management and ensure that an open door policy is consistently applied not only to a core team but in all divisions and locations around the world. You need to foster the best that people have to offer. They should encourage those who work for them to get a mentor and be a mentor, and to reach out beyond their specific areas of responsibility to gain a depth of exposure. I think that is absolutely critical in elevating the capabilities of high potential talent to create passionate and energized leaders of the future.
Grant Thornton: What advice would you give a new medical device CFO?
By far the most important area is to grow and develop your talent. The success of any good CFO is all about the people they bring to their teams, how they develop those team members and how rapidly people can take on those next responsibilities, in the future. Hire the best people, not just for a current position but for what you think that person may move into within six months to two to three years. That kind of talent helps position a company to truly thrive.