To spark growth, the conglomerate will spend $6 billion on lower-cost equipment for underserved markets
General Electric (GE) is launching a $6 billion health-care initiative that, in size and scope, rivals its "ecoimagination" marketing campaign and product development push into green technologies.
Called "healthymagination," the initiative announced May 7 is aimed at resetting GE's health-care business, which currently gets most of its revenue from selling diagnostic and imaging equipment to hospital systems, toward rural and emerging markets, as well as toward the priorities set by the Obama Administration. The $17 billion unit plans to develop far more low-cost equipment, such as the portable ultrasounds already being used in developing regions. At the same time, it will focus on services that help hospitals become more efficient and on health-care information technology, which is currently just a small part of GE's business.
In the same way that GE's environmental efforts seep into many of the conglomerate's divisions, the latest initiative isn't limited to GE Healthcare. The company's finance arm, GE Capital, is committing $2 billion in financing to external partners, mostly for health-care IT projects. And the company plans to spend $1 billion creating new health-related content at NBC Universal and funding partnerships with outside companies, such as the alliance GE announced in April with Intel (INTC) to develop home health-care tech for the elderly or chronically ill. In addition, GE plans to improve the efficiency of the health and wellness programs for its 323,000 employees.
Rural and Emerging Markets
The bulk of new spending, however, will be a $3 billion research and development investment over the next six years into affordable health-care equipment designed for underserved populations. The targets will range from emerging markets to rural or even urban areas where technology is lacking. At least half of the unit's spending, GE says, will be on launching products or services that meet internal goals of expanding health care to more people or reducing costs by 15%.
GE plans to launch at least 50 basic products tailored to rural or emerging markets, such as the lightweight portable electrocardiograph machines the company has developed for India. While it's unlikely that such low-cost products will boost the company's lackluster earnings in the near term, GE executives believe the strategy will position them to benefit from health-care-related stimulus spending and global population trends over the long haul. "You can deal with change, or you can get out in front of it," says GE Healthcare CEO John Dineen.
With its massive finance arm struggling, the Fairfield (Conn.) company is now reliant on its industrial businesses—which include health care, infrastructure, energy, transportation, and media—to keep profits humming. The health-care unit, which has been run by Dineen since July, has hardly been one of GE's growth engines in recent months. Hospitals are slashing costs and budgeting fewer purchases of GE's core products, such as MRI machines and CT scanners. In the first quarter, revenues for the health-care unit were down 9% from the year before, with profits down 22%. In the company's first-quarter earnings call, CEO Jeffrey Immelt told analysts: "We had real headwind in health care, as that market is proving to be very difficult, particularly in the U.S."
With the new "healthymagination" effort, GE hopes its health-care unit will grow two to three times as fast as U.S. gross domestic product over the long term. Besides building low-cost digital X-ray machines or more affordable cardiac equipment, GE is joining Microsoft (MSFT), Google (GOOG), and other tech titans in the land rush created by the spending in President Obama's stimulus package for health-care IT. In conjunction with Intermountain Healthcare, a Salt Lake City hospital system, and the Mayo Clinic, GE plans in 2010 to commercialize technology that helps physicians make clinical decisions. And with financing from GE Capital, it will focus on lending to hospitals and doctors who want to take advantage of new federal financial incentives for electronic medical records.
Cutting GE's Own Health Outlays
In true GE style, the company has invented a new metric—which it calls the health-care "value gap"—to track the progress of the new initiative. The difference between GE Healthcare's earnings (which it hopes to expand, of course) and the amount GE spends on employee health care (which it plans to decrease), the "value gap" is a number GE plans to share with investors, though it won't say how often. Right now, the company says, it has a $500 million positive gap.
"At this point we haven't put targets on it nor have we put bounds on it," says Dineen. "But we think this is absolutely critical to driving double-digit growth in the health-care business."
To decrease the amount it spends on health care for GE employees, Immelt—who ran GE's health-care business before being named CEO—has asked Vice-Chairman John Rice to run an internal effort to lower costs. GE plans to turn its 175 employee health centers into wellness clinics, give personal health records to employees, and offer more financial incentives to employees for healthy behavior.
The company says an independent consultancy called Oxford Analytica will be verifying its progress. So far, GE says, the research firm has "qualified" seven of its products that offer the 15% improvements that it's promising, with 20 more in the pipeline. A GE Health Advisory Board, which will include former U.S. Senators Bill Frist and Tom Daschle, is also being formed and will give regular public updates on GE's performance, the company says.
Like its green efforts, the "healthymagination" initiative is equal parts business strategy and marketing campaign, no doubt aimed to brand GE as a more caring conglomerate. Print advertising will begin immediately, new television spots are planned for the fall, and GE's Web page already sports interactive maps of life expectancies and medical spending around the world. Whether or not it provides a healthy dose of earnings for GE, of course, will remain to be seen.