GE and Siemens: Less May Mean More (Profits)

As President Barack Obama and Republican leaders debate how best to contain runaway Medicare and Medicaid costs, medical equipment makers such as General Electric's (GE) GE Healthcare and Siemens (SI) have embarked on their own quest to help hospitals reduce wasteful spending and treatment errors. It's a bid to keep profits growing even as hospitals face austere times.

Hospitals continue to spend millions on the scanners and other high-end medical equipment made by the companies. Increasingly hospital chains and other healthcare organizations are also paying GE and Siemens for software programs, electronic medical record management systems, and consulting services to improve efficiency. As much as $500 billion of the $2.2 trillion spent on health care each year is wasted on duplicate processes, bad coordination, and out-of-date scheduling, according to a GE estimate based on data from the U.S. Centers for Medicare and Medicaid Services. It's a challenge and opportunity all rolled into one, says Jan De Witte, who on Apr. 1 was made chief executive officer of GE's health-care IT business unit. "It's generally accepted that for every $100 spent on health care, $20 or more is waste," says De Witte. "Over the past two years, the industry has come to grips with this being a problem."

GE Healthcare last June created a consulting arm, also headed by De Witte, aimed at helping administrators use resources better and become more cost-efficient. Staffed by more than 100 people, the consulting unit hopes to generate $1 billion in annual sales in five years. That may seem small compared with GE Healthcare's $16.9 billion in annual revenue, but the company sees consulting as a growth business and enjoys the advantage of tapping customers it already knows well.

Though health-care companies long ago branched into information technology to diversify their revenue streams, the health-care overhaul signed into law by Obama in 2010 has created more openings. Hospitals are required to use more information technology to reduce costs and medical errors. If they don't, their reimbursements from Medicare and Medicaid will decline over the next several years. As a result, hospitals are looking for expertise from outside companies to improve their patient care by digitizing medical records and rigorously analyzing patient data to determine which treatments are most effective. Hospital executives are "looking for software that's going to guide them, help them, based on evidence," says Luis Castillo, who helps oversee the business management unit at Siemens. "I've seen a lot of demand."

The drive to cut costs is also changing GE's core imaging machine business, which makes ultrasound, magnetic resonance imaging (MRI), and other machines. GE will introduce 80 products over two years, including an MRI that scans only extremities, freeing up whole-body machines for more complex scans. "You've got to show increasingly some way in which the customer can make money," says Omar Ishrak, chief of GE's health-care systems business, which includes the imaging machines. "Now there's two ways of doing that. One way is the customer's cost goes down. The other is the customer's revenue goes up."

Nicholas Heymann, an analyst with Sterne Agee & Leach in New York who follows Siemens and GE, says that while improving molecular imaging—with its ability to catch disease early and tailor treatment—is the most glamorous way to save money, the U.S. health-care overhaul is forcing hospitals to look everywhere to cut costs. "That's going to become the heart and soul of the health-care 'revolution' for these guys."

The bottom line: GE and Siemens are developing IT and consulting services to help hospitals with tight budgets cut costs and improve patient care.

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