Interview Transcript

Disclaimer: This interview is for informational purposes only and should not be relied upon as a basis for investment decisions. In Practise is an independent publisher and all opinions expressed by guests are solely their own opinions and do not reflect the opinion of In Practise.

Perhaps we could start by discussing the framework you used to segment the market during your tenure at Intuitive. How did you approach the different market segments?

Our markets, as well as our compensation, were segmented by specialty and procedure. For example, we regarded urology as its own category, encompassing procedures such as prostates, sacral, pyeloplasty, nephrectomy, and partial nephrectomy. We required our representatives to report the number of each procedure performed every week. This allowed us to monitor the impact we were having on each procedure on a daily, monthly, and quarterly basis. We could track adoption curves and identify trends. For instance, Intuitive recently signaled, and Wall Street picked up on, Ozempic was slowing down procedures for kidneys and morbid obesity. We can quickly identify such changes because we monitor each specialty and procedure so closely.

I've been considering how you have this robotic system that you're selling to hospitals, which come in various forms such as hospital systems and individual hospitals. I'm interested in the end buyers. How would you segment these types of buyers?

As you said, the US market is quite different from other regions. We have major hospital conglomerates in almost all cities. For example, 20 years ago, competing hospitals in New York City formed a group called Northwell Health, which started with Long Island Jewish, North Shore University, Long Island Jewish Hospital. They began acquiring smaller hospitals, eventually forming a large conglomerate of 23 or 24 hospitals. Similar trends occurred in other cities, like CMC in Charlotte, which acquired hospitals and changed its name to Atrium. This consolidation is beneficial for us as it provides a single negotiation point for an entire system. Instead of dealing with contracts for 23 different hospitals, we now negotiate a broad contract for Northwell. This simplifies the negotiation process, dealing with the same set of lawyers and terms. It essentially consolidated our business. We also deal with major national players like Kaiser Health, the VA and DoD, and HCA, which is the largest privately owned hospital network in the country. Many of these are now under long-term sole source agreements. For instance, HCA has decided not to purchase a significant share of other companies' robots due to a deal that sets their price.

To summarize, there are various hospital groups such as major city, regional, or local ones, as well as national hospital systems like HCA and Tenet, to name a few.

Yes, we have a representative assigned to each one of these groups, as well as regional representatives. For instance, the lead at Tenet negotiates the deal with Tenet, and then disseminates the deal to his team. Let's say there's a Tenet representative in Dallas, another in North Florida, and they cover all the local hospitals to ensure that all administrators understand the deal that Tenet just signed.

We now have this structure for almost every major buying group. The smaller groups are managed regionally. For example, Northwell Health isn't handled by a dedicated person. The representative who manages Northwell probably also manages the Catholic system on Long Island. So, they might handle three or four systems in total.

Which of these segments are the best fit for Intuitive Surgical to sell into?

The for-profit hospitals are by far the best fit. This is similar to Europe where the private hospitals are the most suitable. The needs of these organizations largely differ because they are all negotiating contracts with national payers. For instance, if I represent HCA, I might have a meeting with Blue Cross Blue Shield to demonstrate the value we provide that they may not understand compared to our competitors.
I would explain to them that with the use of a robot, we can discharge patients in 2.2 days as opposed to the six days it takes them. Our 30-day readmission rates are half of theirs. I would then propose a negotiation for a 45-day readmission rate, but for a higher payment. In essence, they share the risk with major payers based on their data on robotic performance, which gives them a competitive edge.

They were also the first to understand the value model of Intuitive from a financial perspective. They were the first to analyze actual costs and clarify things. In the past, data showed that robotic prostates were $7,000 more expensive per case. However, Intuitive wasn't concerned because hospitals were buying robots regardless, as they were the only way to perform minimally invasive prostate surgeries.

Intuitive's strategy was to avoid discussing the data and focus on executive-level conversations. However, we noticed a slowdown in our business around 2013, largely due to cost concerns from hospital executives who were looking at these old studies. These studies were flawed and didn't provide a clear methodology for arriving at the costs, making it impossible to reproduce the same costs in a different hospital. This resulted in a wide range of costs.
I began to argue that the actual costs were not as high as they appeared. The cost difference between our robotic procedures and laparoscopic procedures was not as significant as it seemed. If we didn't start telling this story, they would continue to believe the inflated costs.

That makes sense. Now that we have an understanding of the market segmentation and the different types of buyers, I'm curious about your approach. In the past, the key to driving adoption in an institution without a robotic program was to approach the surgeon. However, it seems this has shifted towards hospital administrators being the primary contact, or even them approaching Intuitive. Is this accurate? How has this changed over time? Who is typically approached within a hospital that doesn't yet have a robot?

Our approach has always been clinician-first, although their roles have evolved over time. In the past, we would attempt to create a divide between the clinician and the administration. We would coach the clinician on what to say to the administrator, with the aim of convincing the administrator to purchase our robot. This was the strategy we employed at Intuitive for the first 12 years.
We would even suggest to a doctor that they move their cases to a location with our new robot, with the hope that the administrator would buy a robot to retain the doctor. This was a rather underhanded tactic, but it was how we operated.
Today, our approach is different but still clinician-first. We aim to help hospitals solve problems with open surgery in gynecology. We identify staff members who may benefit from using the robot and guide them through the sales and technical training pathways to get them on board. Concurrently, we discuss the benefits of da Vinci with the administrators. We're now almost a decade into the da Vinci story, so we usually have access to the administrator. We propose finding a gynecology doctor to replicate the impact we had in thoracic surgery. We explain the scope and potential requirements. By the time the doctor approaches the administrator, the administrator is usually ready to make a purchase, provided enough doctors are on board. Our approach is now much more collaborative and data-driven from an outcomes perspective.

How challenging was the transition from this adversarial to a more collaborative approach? I imagine you encountered resistance along the way.

Our business experienced a stall for about a year and a half, from 2013 to 2015. During this period, our business was maturing as we had reached saturation in urology and gyn oncology. We encountered a challenge with gyn, and we didn't have a clear direction for the next procedure we were going to introduce. This led to difficult cost conversations. The leadership team, consisting of Lonnie, Jim Alecxih, and Jerry McNamara, insisted on maintaining the same approach, but harder and faster. This resulted in a high turnover rate.

Lonnie then decided to retire and appointed Gary Guthart as his successor. Gary, being an engineer and not a salesperson, brought a new perspective. He was intuitive and empathetic, understanding people well. He listened to our customers and our internal team. He promoted Dave Rosa and brought back Henry Charlton, who had been selling in Europe, to the US team.

We shifted our sales approach. Instead of just selling robots, we started asking customers why they wanted a robot. We wanted to understand their needs and see if our robot could address those needs. This approach helped us to reestablish our relationships with customers.

Darla Hutton took over marketing. She was a nurse turned salesperson and was very intuitive. The decision-making process also changed. Instead of just three people making decisions, a group of about 15 of us from the commercial operations team decided on our forward positions and how to communicate with administrators, doctors, and nurses.

We were no longer pressured to sell more robots every quarter. We focused on the value piece, what we referred to as QTI (Quantifying the Impact). We aimed to demonstrate the financial impact of da Vinci on institutions before moving ahead with something else. This approach largely improved our relationships.

This change, along with the introduction of the Xi, reaccelerated our organization. Fortunately, we hadn't made any major mistakes in Europe, Asia, or the Middle East. As we learned to communicate our value story, we were able to share it with the national health systems of other countries. This was beneficial for them as they operate on budgets. If we could help them stay under budget by reducing the cost per patient over the course of their treatment, we would win. That became our primary focus.

I'd like you to walk me through a typical customer journey for Intuitive Surgical. Could you explain the process from the initial approach all the way until a decision is made?

Do you want me to start with a hospital that doesn't have a robot, or a hospital that is adding robots?

Let's start with a hospital that doesn't have a robot.

If a hospital doesn't have a robot, we would purchase data. We would examine the data to see who performs the most procedures and who has a correctable open rate. For instance, a surgeon who performs all his gallbladder surgeries laparoscopically, but about 10% of them are either opened or were originally opened. If we can reduce that rate to 5%, can we assist him? He's a highly skilled surgeon. It's important to note that you should never choose a poor surgeon, because you can't improve a bad surgeon. Bad decisions can't be rectified on a robot either. Anyone who makes poor decisions will continue to do so. Therefore, you select a good surgeon who has a slight skill gap that the robot can fill.

We would then try to cold call him and, for the most part, get him to experiment with a robot at some point. The reason the company is named Intuitive is because when doctors initially sat down at the prototype, they kept saying, "It's very intuitive." This led to the name Intuitive.

We could have a doctor play a few games on a simulator or with small toys on a table. The surgeon would then say, "Wow, this is so cool." We could teach a lot on the robot, but it's meaningless until you see it in action. Would you like to do that? Most of them respond positively, expressing a desire to see someone using it. They want to see Dr. So and So. We have a list of surgeons. If I'm going to introduce you to someone, it will be someone who is clinically proficient, generally a good speaker, so you can have a meaningful conversation.

This surgeon has good outcomes and can prove it. He performs the procedure in roughly the same time as you do it laparoscopically. So there's no concern about it taking too long. I'm going to arrange a day that mirrors your day with a surgeon who is very similar to you. That's what I'm trying to align him with. Then we'll delve into procedures.

Before we set the date to fly out to Dr. So and So, I'm going to observe some of your procedures as you currently perform them. The reason for this is that I want to understand what is important to you in surgery. Often, what you'll observe are the nuances of surgery. For example, when a doctor is operating with his two hands, someone else is holding the camera. But often, a doctor will adjust the person's hand and move the camera slightly and stay there, then they'll work in that spot. They don't realize that they're controlling the camera themselves, but they are. They think someone else is there, and they're just doing their work. These are compensating movements for the lack of benefit of a manual camera in laparoscopy. But they've been doing it so long, they don't realize they do it.

You'll be able to say, "Here are a few things I noticed. Do you always have the same cameraman? No. Does it frustrate you when it's not the person you're always with? Very much so. How would you like to control your own camera?" Then you're going to guide him through those procedures that day. If the day goes well, you can look at him and say, "See what I mean about the camera, how he's always focused on it."

It's quite remarkable. After we've convinced a doctor to commit to this, we sign him up for a lab. Before the lab, we conduct practice sessions to ensure he's well-prepared. At the lab, he's required to perform a series of tasks in an exam that is graded. The person grading them is not a salesperson, and they have failed doctors before. We caution the doctor that if they miss their practice sessions, they will fail in the lab and waste their money.

We insist that every surgeon pays for their training. We call it having 'skin in the game'. If they're not willing to invest $3,000 to change their career, they're probably not truly committed to adopting the robot. Initially, they question why they have to pay, but once we explain, they understand.

Most of the time, the majority pass the lab with flying colors and already have procedures scheduled. Our goal is for them to perform multiple procedures in a day. Ideally, three on the first day and three on the next. This is because, much like driving a car, the more you perform an action, the more it becomes second nature. By the end of the sixth case, the focus shifts from the robot to the patient.

We reinforce this, especially with the visiting surgeon, who continually praises their progress. They encourage them to keep booking cases. If a surgeon can complete 13 cases in the first 90 days, there's over a 90% chance they will continue using the robot. We knew this magic number.

We would analyze the data, looking at those who completed two cases, four cases, and so on. The top performers were usually those who completed 13 cases. There were occasional outliers, but for the most part, this number was a strong indicator of commitment and competence.

Additionally, their team also becomes more competent. In the first few cases, we have to guide them, but by the sixth case, they know what to do and which instruments are needed next. Once the team starts to flow like this, it's a sight to behold.

Are you or any other salesperson, perhaps the capital salesperson if it's the first sale, present during the first 13 cases or during the first 90 days? Or is there a point when you step back?

That's a good question. Typically, the capital person is present for the first two or three cases if a new robot is being used, unless they have an exclusive relationship with a surgeon that we can't disrupt. There are indeed such relationships. If a surgeon insists on the best of the best, which is usually the capital person who was promoted from a clinical role due to their exceptional skills, we don't want to interfere with that relationship. However, we generally have our clinical person alongside them, observing. This way, when the capital person leaves, the surgeon understands that the clinical person is their new point of contact. We don't want to introduce them at the end of the 13th case and then leave. We always consider the importance and size of the practice, as well as the surgeon's personality. Believe it or not, many surgeons have Asperger's syndrome, which requires a delicate relationship. We don't want an inexperienced, aggressive person who doesn't understand the surgeon's clinical needs to step in immediately after the sale, as this could lead to the surgeon withdrawing.

It certainly requires some finesse.

Indeed, it's about understanding the relationship and knowing when to transition out. Within our clinical team, we have different levels. We had an executive clinical sales rep, senior clinical sales rep, a clinical sales rep, and then a clinical territory associate. And those obviously are also pay scaled down so early on, it's probably CSR or higher in there. But then once he gets to case 13, you might drop that on a CTA. Drop it on a CTA. Gives them a learning opportunity, helps them learn to develop relationships in the OR. And if there's any issues, you call me, I'll come in. Do not delay. Right. It really kind of helped grow the organization, too. And then about every two years, each of those tiers is eligible for a promotion to the next tier.

It's interesting how that works. So far, we've mostly discussed selling to the surgeon. From my perspective, there are two types of customers. There's the administration and the surgeon. What is your pitch to both of those?

If it's the first sale, we weren't pitching to the administration. We had the surgeon, and we would spend hours sometimes, guiding him on what to say to an administrator. We'd discuss his practice, his open procedures, and compare him to another surgeon. We'd show how the other surgeon transitioned from laparoscopic to robotic surgery and improved his numbers. We'd assure the surgeon that he could achieve the same with the robot. We'd spend a day in the OR, walking him through the entire process he's just been through.
We know what the objections are going to be. They've always been the same. The robot takes too long. The robot costs too much. And if you're new to a robot, who's patient zero? Who are you going to put at risk because you've never sat at a robot before, and they're your so-called guinea pig? So, the doctor must have answers for these three questions because they are inevitable.

Generally, if they say, "We've heard the robot takes a long time or minutes are very expensive, so we're really not interested," even though we could save money on some of your cases, your other cases are going to cost so much more because of the time spent in the OR. The surgeon can counter this by sharing his experience in five procedures at a hospital where the surgeon is as fast as him, robotically, as he was laparoscopically.

When it comes to cost, we generally don't like a surgeon to handle that, because it's a deep conversation. That's when we say, "If you're worried about cost, because Intuitive gets this question all the time, I'd love them to walk you through what they showed me." We walk in with an analysis of all their cases, what they get paid roughly in each case, and if we have their payer mix, that's fairly easy to do.

We know the income from the case, we have length of stay, all that sort of stuff. We make assumptions. We're only going to change 15% to 20% of the cases to minimally invasive. We're not going to get them all. We're being super conservative, and then we're changing length of stay costs, step down costs, blood loss costs, 30-day readmit costs, all complication costs. We're changing all of that surgical side infection costs. But we also put in the cost for the instruments and the robot, and that's often eye-opening for an executive. In his mind, he's thinking, "Robot, $10,000, laparoscopy, $3,000. I don't want to spend the extra $7,000 for the five procedures you do every day, times seven. That's a lot of money."

{audio:0035:04} But when they look at the robot cost, they look at the robot cost and instrument cost, generally, you're going to get the question, "Where did you come up with this number?" And it's like, well, actually, we lease a lot of our robots on a per click method. So that cost is a blended average for your hysterectomies, a three instrument hysterectomy, which is typical. We know that because we know our choreography from every robot being used for hysterectomy.

So that'd be your instruments, disposables, and accessories, right. And then that other cost is the blend between the system cost and the system service per case. So it's only $4,700 to use a robot. It's like, "Yes, what does laparoscopy cost?"

The funny thing is, they never put the service or the purchase cost of their laparoscopic towers. They're not in there. They're in the general facilities fee that gets charged to every procedure. So robotically I'm paying for the lap towers, too, although you're charging me a specific separate cost for the robot. It's one of the only devices in the OR that they lump in there where it technically should be, because it's bought on your capital budget.
It should be along with your new parking garage, the new cafeteria you just put in. Those are facility fee costs. They go into the per minute charge in an OR. That's where they should be. No one should see a robot cost. And that's really what we uncovered when we were looking at, why do they perceive the robot cost so much.
And then they would have an instrument mistake. Our instruments cost about $3,000, but they're used 10 times. Now, if you're a materials management guy, you don't know that. So you're just saying they use three instruments, that's $9,000, and it's three instruments. When you divide it by 10, is 300, it's $900. You made an $8,100 mistake.

The average revenue per procedure is between $600 and $3,500 per procedure.

I would argue that the cost, or what we refer to as revenue, is what they get paid to perform the procedure. Then there are cost and charges, which can be confusing in hospital charges. For instance, if I were to have surgery to fix my hernias, my bill would be $22,750. However, my insurance company would state that they have a negotiated cost with the hospital for that DRG, and they will not pay more than $7,200. They would cover $5,500, and I would owe $1,700. So, charges are somewhat arbitrary.

Hospitals often calculate cost as a percentage of charges, which is problematic. This is likely how the hospitals in studies did it. However, this is not an accurate number. The correct method is activity-based costing. If you wanted to compare to laparoscopy, you would consider the costs of the four trocars, the ultra shears from Medtronic, the stapler from Ethicon, and their cartridges. That total comes to $1,722.
When using the robot, you need my drapes and seals. My trocars are reusable, so you're not really paying for them. The instruments you used cost $917 for that case. So we'll add up our costs and say that we're $1,850. We're $180 more expensive on your back table than them. Now, there's the cost of the robot maintenance, but there's also the cost of laparoscopic powers and maintenance.
This brings us to an almost even playing field. That's when they realize that the value of the robot is so much greater that we should be doing more robotic procedures. If you can get them to say it's almost a tie, then the advantage goes to the runner. The interesting thing about laparoscopy is that instead of moving to the robots, they're trying to make instruments that articulate like the robot. They're trying to get a better vision system that does ICG nine like the robot. So they're doing all these things like the robot, but all of those now are additional costs. And so as they're improving laparoscopy to become somewhat like a robot, they're also increasing their cost to become somewhat like the robot.

I'd like you to delve deeper into the unit economics later on. This introduction has been very helpful. I still have a question, though. When considering a hospital and the decision-makers involved in purchasing a robot, who are these decision-makers typically? Can we differentiate between first-time buyers and others.

In most cases, it's either the CEO or the CFO of a hospital. It's crucial to know who's who. Around 95% of US buyers are either the CEO or CFO. If the CEO is a powerful individual and a visionary, like Fahad Tahir in Nashville, he buys robots. He purchases robots because he wants to be more modern than his competition in Nashville. He'll tell the CFO to make it work. There are those guys, like the ones at Inova in DC, who are visionaries. I bet they've already bought a Medtronic robot and they'll buy a Cambridge Medical robot because they want to be the ones offering it.

So, the CEO or the CFO is essentially the main decision-maker.

To clarify, when a CEO is purchasing, it's visionary. They might have brought in a new doctor who's going to implement changes. They simply write the check for the robot. The CFO, on the other hand, might be taken aback, as they haven't even looked at the finances. It's like, write a check for the robot because I'm your boss. Those are the best situations. However, it's still important to sit with the CFO as they may make purchases without fully understanding the economics. This could cause problems later if not addressed. You'd want to sit down and discuss what they think is driving the costs of their robotic procedure so high, so that corrections can be made. If the CFO is the decision-maker and the CEO says, "If they agree, we'll proceed," that's a longer process. This person wants to know the ROI, when they'll become profitable, how many procedures you're asking for, the cost of each procedure, and how it compares to their current costs. This person will have you digging into numbers with someone who doesn't understand robotic numbers. You'll likely spend three months teaching, but you'll act as though you're listening for understanding, even though they don't know what they're discussing.

The decision is essentially made by one person. It's either the CEO who uses their authority to make the purchase, or the CFO who gets the CEO's approval to buy if the numbers add up. What is the role of a robotic program director in this case? Do they have any influence on the purchase of a robot?

In old sales terms, we would refer to this person as an influencer. You want them to have the data. If the CEO asks, "Are we getting those two robots?" CEOs are not always the most diplomatic. They might say, "That's a decision we're discussing in the executive team right now. So I'm asking you to hold off on that," or they might voice their current objection. For example, "We were considering it, but we don't think we have the space for the robots. Where am I going to put these robots? My rooms are running full five days a week." Our job is to prove that installing robots in two rooms will draw the robotic cases into those rooms, freeing up the other rooms for non-robotic cases. He has the room, he just doesn't realize he's swapping one type of procedure for another, and that it's still valuable. We use this person to uncover objections. We're usually very close with this person because their career is tied to the robot.

They're the ones getting promoted or getting a raise because of you.

Exactly. They got promoted. They were a nurse or a nurse tech or something similar, and now they're the robotics coordinator. Often, they become the robotics coordinator of the system. They were just working in their hospital, but now they have this administrative job and they become even closer to you. The interesting thing is, in the industry, they are influencers.

Regarding the actual negotiation, let's say everyone agrees in principle that a robot would be beneficial. But it's now just about the price and the type of deal you can secure. What negotiation levers do both sides possess?

Our negotiating window isn't very wide. We're aware of our robot's price and we generally know the lowest price we can offer. This varies slightly each year. In the past, an area sales manager, who is the lowest level capital representative, had a leeway of $50,000 to $100,000 without needing any approval. His director, the next level up, could probably offer an additional $50,000. Anything above that, especially in the old days, went directly to Jim Alecxih, the Senior VP of Sales. Jim was not a negotiator, so there wasn't much flexibility.

Today, we have numerous agreements. For instance, we have a Department of Defense (DoD) agreement. By law, in the US, we can't sell a robot that performs the same function to the military at a higher price than we sold it to a commercial customer. So, we can't go below the DoD price. However, we can offer different structures. For example, if a robot is priced at $1.85 million, I could probably sell it for 1.675 million to a DoD customer, and I have to be at 1.7 for HCA. But if HCA chooses to lease it or commits to a certain number of procedures per quarter, then I can adjust that deal.

The DoD didn't sign up for that. They're not going to perform 75 cases in a quarter. But if they're willing to commit to that, I could reduce the price of their robot. So HCA gets the benefit of volume. This is a common practice. Companies like US Surgical, Medtronic, and Ethicon have contracts that are based on price for the hospital, but we also offer benefits for high volume hospitals. This allows us to work within the DoD rules and offer discounts to high performing customers.

So, you already have structures that offer benefits for volume guarantees. Are there other levers that you can use, like bundling of products? Other ways to sweeten the deal?

Yes. We could do some creative things with instrument pricing, but we generally didn't choose to. We're not like Medtronic because we only sell the Ion and the Xi. We don't also sell gauze, sutures, and staplers, so we can't dip into another bucket. We only have one bucket.
Effectively, we charge you for four things right now. We charge you for instruments and accessories, robots, service, and we're starting to charge for the digital hub and all that sort of stuff, which includes simulation in there and all that. So those are our four revenue streams and there's really nowhere to bundle from.

In the early days, we did a lot of what you're going to see Medtronic and Cambridge do when they first start out. We would loan you a robot for your lab space. You wouldn't own it, we would, and we would maintain it. But you would get surgeon training, we could bring customers in to see it, and then we would sell you the robot for a discounted price, say $750,000 instead of one million, and your instrument cost would be set. Intuitive did this early on as well, but it's not a common practice anymore.

Moving on to the unit economics, let's consider a typical hospital customer and a typical robotic procedure. Could you walk me through how you would set up the financial analysis and the ROI analysis for a hospital? I'm particularly interested in a line by line comparison with laparoscopic procedures.

To do this effectively, we need to determine their specific numbers. I can simply work from the bottom up, which would be my preference. This approach would provide the most favorable comparison and it's the actual comparison. They will present their numbers from the top down. For instance, when they perform a laparoscopy, I'll see large numbers. A laparoscopic hysterectomy costs $7,400, while a robotic hysterectomy costs $11,900. That's $4,000 more expensive than laparoscopy, and that's just the cost. It doesn't include factors like length of stay.
So, I need to understand where this $4,000 difference comes from. They might tell me it's the cost as a percentage of charges. If that's the case, they're charging more for the robot than for the laparoscopic procedure. I need to figure out what's included in that number. I'm particularly interested in two key areas.
Firstly, I'm looking for an instrument cost that is disproportionately high for the robot. Based on the instrument cost, I can usually tell what mistake they're making. They might be counting all the instruments in the sterilized tray, including ones they don't use. If an instrument isn't used, it doesn't count a life, so they shouldn't be charging for it. Alternatively, they might be charging the full price of the instrument rather than the per-use charge. There's some mistake in there that I need to identify.
The second major hidden cost is a robot fee. They might charge this fee in several ways. Some hospitals simply apply a flat fee. Every time a procedure uses a robot, they charge $4,000. However, this $4,000 isn't a real number. For some, it's $1,500. For others, it's $7,000. They've essentially just picked a number and charge that every time the robot is used in a procedure.

Another way they charge for the robot is during a laparoscopic gallbladder procedure. This procedure has an acuity level, which is generally set at two. This level signifies that the procedure requires some skill, but it's not overly difficult. The acuity level determines the amount charged per minute for the operating room. For instance, an acuity level of two might lead to a charge of $100 per minute for the room. The actual cost of the room, however, is probably around $18.

If the procedure is done robotically, the acuity level is often set at five. This is because robotic procedures originated with prostate surgeries, which are always at an acuity level five. These are highly difficult procedures, performed by specialists. We found that hospitals were charging at acuity level five for all robotic procedures, regardless of whether it was a gallbladder or a prostate surgery. They didn't adjust the acuity level for simpler procedures like gallbladder surgeries.

Consequently, instead of charging $100 per minute, the charge for the operating room increased to $175 per minute. The actual cost is only $26, but the charge is significantly higher. This is what we are trying to educate people about. Usually, the CFO delegates this task to a finance manager. I'm currently working with a finance manager who doesn't have a bias towards or against the robot. He's trying to find out the truth.

Generally, they will take guidance on the charges for robotic procedures. When we ask about the charges for laparoscopic tower procedures, they often respond that they don't have a specific charge for it. They usually include it in the facility fee. It's mixed into the broad capital that they purchase every three years, and so on. This is quite interesting.

We should consider removing the robot number and incorporating it into the facilities fee. Additionally, we should adjust the acuity level for simpler robot procedures. The more complex ones remain at level five, but the simpler ones should be moved to level two, similar to laparoscopic procedures.

The issue is that the Center for Medicare, also known as CME, doesn't provide guidance on setting acuity level fees, allowing hospitals to set them as they see fit. This lack of guidance from the US federal government can lead to a situation where hospitals appear to lose money on a procedure, even if they don't.

For instance, if the costs and revenue from a procedure balance out, but the charges are higher, it appears as a loss to the hospital. This creates an incentive for hospitals, such as HCA, to report losses. They can claim that despite making money on certain procedures, they lost so much on others that their overall profit was minimal, reducing their tax liability.

There's an incentive to misrepresent the acuity level on procedures at the hospital level. The challenge is to get them to understand their true costs. Once we achieve that, we can then break down the costs instrument by instrument.

For example, for a hysterectomy, the total cost of laparoscopic instruments, including trocars, graspers, dissectors, etc., is $750. For a robotic procedure, the cost is $1,100, a difference of $400. This is when we can shift the conversation to value. We used to illustrate this with an iceberg slide, showing the instrument cost and the cost of a robot as just the tip of the iceberg. What's not being considered is everything underneath.

We need to consider factors such as length of stay, 30-day readmission rates, complication rates, surgical site infections or occurrences, and the cost of treating these. We have national numbers that we can use for comparison.

We can show them the difference between robotic, laparoscopic, open, and converted procedures based on the database. Perhaps your contribution margin for the robot was projected to be a million dollars a year, but when you consider the total value of robotics, it's more like three and a half million dollars for the two robots you're bringing in annually. This is because of the impact on your entire patient population, not just individual patients.

This is where Intuitive is today in the US with most customers. Selling to HCA at an Intuitive level is, I wouldn't say easy, but simpler. All we're really doing is highlighting their problem areas, such as the high costs associated with a high percentage of open lobectomies in the Kansas City marketplace.

Have there been instances where the customer has rebutted the economics you present, and you found that they have valid points? Have they ever looked at the situation in a more accurate way than you did? I'm curious about that.

We don't always win each display. It often requires a lot of persuasion. However, the advantage is that we can present national data averages and Medicare rates. If there's any doubt about the numbers, we offer to provide a template for them to input their actual figures. If they're diligent and use their own numbers, the finance manager will likely confirm to the CFO that we were not only correct but also conservative.
If we can increase the contribution margin to the level Intuitive believes we can, the CFO will likely approve the decision. With the introduction of the per-click model, the risk to the hospital of bringing in two robots is minimal. If the robots don't perform as expected, the contracts generally allow for them to be returned.

When we install two robots, it motivates Intuitive to ensure they are utilized to their full potential. This is why they created Genesis and other startup teams. If a new program is initiated, two robots are sent to your cardiac tower. We train every staff member involved, from those who clean the instruments to those in the operating room and post-op.

This training doesn't take up a rep's time. A group called Genesis, which signifies the beginning, comes in at the start of the program to ensure everything runs as smoothly as possible until the first cases begin. Then the clinical team takes over. Genesis also measures various aspects, such as room setup and breakdown times, and the frequency of the doctor's presence during room setup. They aim to make robotic procedures as fast as laparoscopic ones, which is a goal incentivized by Intuitive. If the robots are being used, they're obviously not going to be returned.

You then benefit from the high gross margins from the instruments, which is excellent. Are there less tangible economic benefits we haven't discussed, such as attracting patients or talent? How important are these factors to decision makers when considering a purchase?

If you look at the hiring requirements of HCA for general surgeons, thoracic surgeons, and gyn and oncologists, you'll notice they are seeking surgeons trained in robotics. They usually place these surgeons in new hospitals that are about to receive a robot and start a program. Most institutions, particularly the for-profit ones, are almost exclusively hiring robotic surgeons. It's crucial to have a robot ready for a fully trained 28-year-old surgeon because they are coming out of training eager to use their skills. If they are limited to laparoscopy, they will likely become frustrated and leave.

It's also important to note that some patients research where to have their surgery while others do not. Those with a better payer mix often do a lot of research and choose hospitals with the best technology. Patients who trust their primary care provider and follow their referral to a surgeon are less likely to switch surgeons. However, these patients often have Medicaid, Medicare, or are self-pay, which in the United States typically means they don't pay. This results in a less desirable payer mix.
A paper by Elizabeth Geller from UNC, a gyn, included all their robotic procedures. She compared the payer mix where a robot was used for surgery versus where a robot was not used. The most profitable procedures were the robotic ones, not because of the overall cost of care, but because of the payer mix. A patient with a Blue Advantage, Blue Cross Blue Shield card brings in almost double compared to a Medicare or Medicaid patient. It seems that most of our robotic procedures fall into the almost double category.

That's interesting and makes sense. What would a typical hospital customer look for in terms of ROI? Is there a specific percentage number they have in mind? How do they evaluate the ROI number and determine what is satisfactory and what isn't?

It depends on their goals. If you're a smaller hospital and you can't hire a urologist because you don't have a robot, you might buy a robot to attract a urologist. You might only do 30 procedures a year with the robot, breaking even in about three to three and a half years. However, the value of the robot might not be in the revenue it directly generates, but in its ability to attract talent that allows you to establish a urology program. Generally, if you're buying a robot to make money, you should expect to recoup your investment within a year and a half.

That makes a lot of sense.

Many of these are economic purchases, but a significant number are also strategic purchases. The return on investment is less important than the prestige the hospital gains. For example, in the US, hospital advertisements often feature the Xi robot in motion. It's a way to show that we have cutting-edge technology.

That's interesting. It's why I asked the question. The economics are important, but there's also a less tangible aspect that's not insignificant.

Early on, this perception hurt us. Before we could address the cost question, surgeons who didn't use the robot and their CEOs would dismiss it as a gimmick or a marketing ploy. They believed I could just do laparoscopy. They thought patients were asking for the robot because they didn't understand what they were getting, and they believed it was quote-unquote better. As it turns out, the data shows it was better, but we didn't know that at the time, so we were cornered into the marketing angle.

How does the sales process for the second and third robots differ from the first one?

The process is more consultative for subsequent robots. We use their data instead of anonymized numbers. We've established a close enough relationship that we can sit down with them and show them how the first robot is performing. We discuss the cost per procedure with anyone who will listen. In the past, administrators would tell surgeons that it was too expensive, so it's crucial to keep the surgeon informed. If a surgeon can explain to an administrator that the cost difference between a robotic procedure and a laparoscopic one is only $300, it changes the conversation. Administrators used to get frustrated with us for sharing financial numbers, but now they understand the value better.

If a surgeon wants to use a robot to solve a problem, like converting too many bypasses to open bypasses, we can help. We believe the robot can increase minimally invasive surgeries from 60% to 80%. We also offer leasing and per-click models, which reduce the initial capital outlay and alleviate the CEO's concerns. The CEO can then trust the surgeon with the program. So, for the second and third robots, we share their data and so on.

I'm not entirely sure why you're gathering all this information, but an interesting point is that despite Intuitive's stock performing well, they lost a revenue stream about three years ago. This happened when they replaced most of their Si models with Xi models. They had revenue from new robots, recertified robots, and trade-ins. At some point, likely towards the end of 2024, they have got to be close to pulling the trigger on the next-generation robot. That will probably reintroduce the trade-in stream, which we haven't seen in three years.

When that happens, those who have leased on a per-click model or leased the robot instead of purchasing it, are in the best position to simply upgrade for a higher payment. This locks them into a seven-year payment on a new robot. However, when the Xi model was introduced, it took us time to understand its operation. We were selling the Xi and having customers use it just like the Si. Even as sales representatives, we didn't fully understand how the robot worked.

This is a common issue for all companies in this field. They launch a robot without fully understanding its potential uses and without a customer who can provide valuable feedback. We had to learn something new about the Xi until we understood what it was. This learning process took about nine months.

Even for a company that understands robotics better than anyone else, it can take a year and a half to two years before companies like Medtronic, CMR, and hinotori truly understand how to set up a robot, how it works in a specific procedure, which are the ideal instruments for that procedure, and how to develop a recipe for the procedure and teach others to do it right.

When Intuitive releases the new robot, they're going to trade a lot of robots, but they may not find the value of the next generation for 18 months to two years. It might work just like the Xi, but it might take two years before we start talking about a feature like the table, which was the case with the Xi.

We were selling this fantastic table with the robot, but the customers weren't using the table motion. We realized we needed to start teaching table motion. Once we did that, the customers loved it. But for six to nine months, I was in cases wondering why they weren't using the table. It felt like they might as well just have their Si back. I think Intuitive will go through a lot of that whenever they release the new robot. But they're always very secretive. They haven't even hinted at what it's going to be.