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Vendor vs. Provider: Why the Different Strategies?

June 29, 2018
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This week, GE joined Siemens in announcing its intent to spin off its healthcare organizationSiemens has successfully spun off its healthcare business, now a separate company known as Siemens Healthineers.  Last year, McKesson successfully spun off its Healthcare IT business, creating a new company known as Change Healthcare.

I suppose each company had their own reasons for these changes, but they typically were expressed as freeing up the healthcare resources with fewer managerial layers to enable further investment in healthcare technology. 

What I find intriguing is this apparent trend at the same time that healthcare providers continue their consolidation!  One near and dear to me is the merger between Advocate Healthcare in Chicago, and Aurora Healthcare in Wisconsin.  The new organization will serve nearly 3 million patients each year, operate 27 hospitals, more than 500 sites of care, employ more than 3,300 physicians and nearly 70,000 associates and caregivers.  Advocate Aurora Health will join a growing list of facilities that have combined over the past few years.

Why is it that providers see benefit from consolidation while at the same time vendors see benefit from separating healthcare units from their other businesses?  I guess gone are the days with behemoths such as GE and Siemens saw synergistic benefit from offering healthcare providers everything from CT scanners to light bulbs to industrial controls under strategic agreements. 

Clearly, one of the benefits of healthcare provider consolidation is economies-of-scale.  Larger purchasing groups can get better terms from vendors through volume purchasing – important to entities facing continue cost pressure in a changing healthcare delivery and regulatory environment.  It seems counter-intuitive that the large industrials would shed their healthcare businesses in light of these larger purchasing entities.

Perhaps the same can’t be said to be true for healthcare vendors being part of a large industrial conglomerate.  To me, a clear exception based on my experience with GE relates to the corporate research and development center of GE.  GE would never have been as significant a factor in the CT business were it not for this corporate research center.  The original development work for the fan beam CT was done at the research center and then transferred to what was then GE Medical Systems.  This is but one of the many developments from collaborative efforts between the research center and the healthcare business.  What will become of these liaisons in a separate business entity environment?  Will the healthcare unit be forced to contract with outside research and development? 

Also, what of the synergy of other complimentary developments?  Pre-dating TCP/IP network protocols, GE Aerospace had developed something know as GE GEMNet, which was capitalized on in the earliest imaging networks within healthcare. 

For sure there are potential advantages of a separate company.  GE Healthcare has been a very profitable operation for GE, generating disproportionate profits versus other GE businesses.  As part of the larger entity, Healthcare has been forced to vie with other businesses for investment priorities.  As a separate company, will that mean that GE Healthcare has more ability to reinvest in its own business?  I guess it is too early to tell, and it will take the next several years to fully uncouple Healthcare from GE Corporate.

As independent companies, are these healthcare vendors more vulnerable to consolidation?  Will these free-standing companies or other health-related technology companies be inclined to acquire them – something that might not have been as lucrative as part of a larger industrial conglomerate?  What would a GE Healthcare-Change Healthcare company look like?  Or a GE Healthcare-Siemens Healthineers company become?  Mere speculation on my part, but food for thought based on freeing the shackles from their former parent companies.  Buckle up, because it’s likely to be an interesting time for healthcare technology innovation!

 

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