Great expectations

Contracting executives may expect distributors to provide the same level of service – at the same price – for their acute and non-acute facilities. Can distributors deliver?

PONTE VEDRA BEACH, FLA. –As an industry, we could be – as Cardinal Health’s Scott Jackson says – in the eye of the hurricane. The first portion of the storm – during which hospitals focused on acquiring other hospitals as well as physician practices – is winding down. Now there’s a calm, as we wait for the other side of the storm to hit. And when it does, what will it look like?

The remains to be seen, of course. Still, supply chain executives who attended the recent Distributor Insights conference, sponsored by MDSI, publisher of the Journal of Healthcare Contracting, agreed on a couple of things:

  • First, unlike the mating ritual between hospitals and doctors of 15 or 20 years ago, this time, it’ll stick.
  • Second, hospitals and doctors – whether they are in IDNs, accountable care organizations or something else – will become more tightly integrated than they are today.

Together, these two things spell changes – and challenges – for IDN contracting professionals, distributors and manufacturers.

“Consolidation is here to stay; I don’t think it’s a fad; I don’t think it is going to stop,” said Bill Barr, vice president, healthcare systems, Henry Schein.

“Hospitals have too vested an interest in trying to gain market share among the patient population in their marketplace, so they’ll develop a continuum of care that will include nursing homes, surgery centers, home health, retail health, [and more].” Data indicates that as many as 50 percent of physician practices today are owned, leased or managed by an IDN or hospital group. “That’s a big number. It means our customers are getting bigger, [and] we have to compete for that volume.” To succeed, distributors and manufacturers will have to work more closely than ever. “It means we have to mesh together.”

“This doesn’t have the same feel as the 1990s [when hospitals went on a binge acquiring physician practices],” added Ted Thornton, vice president, national accounts, McKesson Medical-Surgical. “It will stay.”

“I’ve talked to more vice presidents of supply chain in the last two years than in my previous 10 years,” he added.

“Things are changing, and changing fast,” said Eddie Dienes, president of PSS. “Whether that change will accelerate or not, I have no idea. But we’re directing our time, talent and resources in this IDN space. We used to say, ‘We serve the physicians in the frontline of healthcare.’ Now we say, ‘We serve the frontline of healthcare, including physicians.’”

All sides facing challenges
Of all the players on the supplier side, physician suppliers perhaps face the biggest challenges of all. Most IDN contracting executives are either unfamiliar with them, or regard them with skepticism. To succeed, these suppliers will have to: a) make supply chain professionals aware of who they are, and b) demonstrate that the services they provide to physician practices have value and are virtually impossible to duplicate, according to those at the conference.

They also must demonstrate that servicing many clinics is more expensive than pulling up a 45-foot tractor/trailer to a loading dock and unloading pallets of product.

But hospital suppliers face some challenges too. It’s true that they have a track record with IDN materials managers. But IDNs may ask those suppliers to provide services that are new to them, such as servicing the IDN’s newly acquired physician offices.

One of the key challenges for the hospital supplier servicing IDNs is determining who the customer is, said Claflin Co. President and CEO Ted Almon. The Warwick, R.I.-based hospital supplier recently started a sales division focused on accountable care organizations.

Typically, it is the corporate materials manager who calls Claflin when the IDN has acquired physician practices or other offsite facilities, requesting that Claflin get the new offices set up, he said. That material manager may expect Claflin to provide large quantities of product, in low units of measure, to the outlying offices. But the newly acquired physician practices have a very different set of expectations. They are, after all, used to having a sales rep visit them every week, counting their inventory, taking care of their needs. Together, these two sets of expectations put the hospital supplier in a tough spot.

There are other challenges as well, pointed out Almon. “One question we ask the IDN executive who wants us to service offsite facilities is, ‘Who’s going to pay the bill?’ A lot don’t want to aggregate payables.” That can get very complicated very quickly, he said.

Meanwhile, IDN materials executives face challenges of their own in this new environment, according to speakers. Just as suppliers are struggling to figure out these new integrated networks, materials executives – most of whom have been brought up in the acute-care environment – are doing the same. Their vice presidents are directing them to incorporate newly acquired physician practices into the organization, and to cut costs at the same time. And the materials managers are demanding their suppliers lend a hand.

Establishing a niche
Physician supplier PSS is aggressively establishing a niche with IDNs, said Greg Silvey, executive director, strategic accounts for the Jacksonville, Fla.-based company. Doing so presents its challenges, though. One large East Coast healthcare system, with whom the company is working, “didn’t know PSS when we went into it,” he said. The IDN was looking to achieve standardization of products and pricing across the care continuum. And a broad continuum it is. “When we started working with them two years ago, they had 1,200 physicians. Today, they have over 1,600.”

But PSS was able to offer its expertise, including information technology. The result: 98 percent fill rates, extensive product standardization, guaranteed next-day delivery and extended ordering hours. “And [the IDN’s] non-acute-care medical supply distribution is under control,” said Silvey.

Another IDN, located in the Southeast, asked PSS to forecast supply-related costs by patient visit and establish a formulary for the system’s non-acute-care sites. PSS was able to help the IDN do so, showing a per-patient savings in the process, said Silvey.

Although PSS has much to bring to IDNs, it needs its manufacturer partners to help, he added. “We’re trying to build out a shift to prevention, patient satisfaction and outcomes,” he said. “If [manufacturers] can help us do that, we can differentiate ourselves.”

Integration is inevitable
With a presence in both the acute-care and non-acute-care markets, Cardinal Health enjoys some advantages over other suppliers. “We feel we’re in a good spot,” said Patti Baran, vice president, health systems, ambulatory care, Cardinal Health. Still, the company’s challenge – like that of all suppliers – is helping IDNs control their expenditures.

To be profitable in a capitated reimbursement environment, IDNs will have to do a better job of managing chronic disease and keeping patients out of the hospital, she said. “Integration and having supply data across the care continuum are key to making this happen.”

With that in mind, it’s no surprise that healthcare systems are spending more time, attention and money focusing on non-acute-care options, including physician practices and home care. Cardinal is responding appropriately, investing in IT systems, a new web portal and other resources to help ambulatory care customers find cost-effective products, said Baran. The company is piloting a direct-to-patient home delivery program with a Midwestern IDN.

Products and services that can help ease the transition of patients from the hospital to the home, and that can be used in the home without mishap, will be in demand, she added.

Plenty of new stakeholders
Physician supplier Henry Schein is attempting to build dynamic relationships with a variety of new stakeholders, said Barr. “Three years ago, 15 percent of our business was tied to GPO contracts,” he said. “Today, it’s 35 percent. That’s pretty rapid growth.”

In addition to GPOs and IDN customers, Henry Schein is working to build relationships with operators of retail clinics, insurance companies, occupational health providers, larger ambulatory surgery center companies, community health centers and others.

Like all physician suppliers, the company has to face the fact that many IDN supply chain executives simply aren’t familiar with them, said Barr. As a result, those executives may harbor some misconceptions. For example, some assume that their acute-care distributor can easily manage distribution to non-hospital sites.

Henry Schein’s new tagline, “Rely On Us,” signals its commitment to help physician practices be more profitable and practice good clinical medicine, and to supply its customers with a broad range of capital, med/surg and pharmaceutical products, he said. The company also intends to be a provider of meaningful data to its customers, so they can monitor their costs and outcomes.

Providers want transparency
Non-physician suppliers have to quickly familiarize themselves with hospital-based materials management professionals, said Thornton. When they do, they’ll find that those professionals are facing reimbursement cuts, and they expect their suppliers to understand their needs and provide solutions to meet them.

Materials managers also want transparency; that is to say, they want to know how and why their suppliers price their products they way they do. And they want regular business reviews with their significant vendors. Perhaps most of all, they want to be able to trust their supplier partners, he said.

Thornton said McKesson Medical-Surgical is up for the challenge. For example, its technological expertise (e.g., electronic data interchange, contract management, etc.), contract management and alternate site expertise – some of which the company acquired in its past experience in acute-care sales – are proving to be of value to today’s materials executives. “We offer a closed-loop process for inventory management, requisitioning, approval, receipt and invoicing,” he said.

The company has years of experience in corporate-accounts selling, added Thornton. “You really have to have a tight team when selling to an IDN, because you often only get one chance to sell it right.” Still, the company’s managers and field sales force are working hard to understand how IDNs are incorporating physician offices, surgery centers, home care, long term care, patient outcomes, disease state management, revenue cycle management and other concepts into their operations. “We want to position ourselves as the best value for the alternate site.”

Who is this new customer?
The speakers were unanimous that each IDN, ACO, integrated healthcare system and independent physician association must be treated on its own terms.

That’s because they span a broad continuum, ranging from the very integrated to the barely integrated.

Some health system CEOs, for example, have decided that the physician practices they acquired should be left alone, to operate much as they did when they were independent, said Thornton. “A huge chunk of the market is still like this.” In contrast, other systems have centralized purchasing and product selection under a vice president of materials management or supply chain.

“There are different methodologies,” said Barr. “Some IDNs are buying physician practices, and allowing them to continue to buy the way they always have. Others believe, ‘I’m buying these practices; now we will mandate their purchasing activity and behavior.’”

Though we may be experiencing some calm now, it’s temporary, said Jackson. “Over the past couple of years, we’ve seen all this activity, with physician practices being acquired [by IDNs]. As these hospital systems have done so, they have focused on things like integrating these practices from a clinical standpoint, then getting them all onto an EMR system. But at some point, they’ll start asking, ‘What are we doing with these practices from a supply chain standpoint?’”

IDNs will want to implement med/surg formularies, he predicted. “Intuition would tell you that at some point in time, [IDNs] will say, ‘The dust has settled on these clinics we’ve purchased; now we need to pick one distributor.’ And then the next step is, ‘What strep kit will we use?’ ‘What glove do I want in each of these facilities?’

“That’s where the rubber will meet the road in the not-too-distant future, when we get to the other side of the storm.”

Self-distribution
Some IDNs may choose the path of self-distribution, though the term has many meanings, according to the speakers. For example, some IDNs are exploring the possibility of sourcing products from countries such as China, then bringing them in to their warehouse and distributing from there. Others take a different view, continuing to rely on distributors to get products to a central warehouse, then redistributing them to their acute-care and non-acute-care sites.

Distributors may view self-distribution as a threat, according to speakers. But they can look at it another way – as opportunity.

“You have to get creative,” said Cardinal Health’s Baran. Her company has relationships with several customers with consolidated service centers. “There are new models, and we’re working with IDNs to figure out the right solution sets.”

As health systems acquire more hospitals and non-hospital sites that spread out across a wide geography with many delivery points, they will face greater hurdles trying to cost-effectively supply products to all of the various sites in the correct unit of measure, she said. “The IDN’s primary mission is patient care; now, population management and wellness are their core strength. A distributor’s mission is focused around supply chain optimization across the entire continuum, both upstream to the supplier market and downstream all the way to the patient’s home.”

What about pricing?
Although IDNs appear to be deeply concerned about efficiencies, value and total cost, they remain concerned about price, according to speakers. Specifically, IDN supply chain executives are likely to make these demands on their suppliers:

  • Lower prices.
  • One price for their acute- and non-acute-care facilities.
  • Transparency, that is, an explanation of how suppliers (both manufacturers and distributors) arrive at the pricing they do.

“The transparency request is like nothing we’ve seen before,” said Barr. IDN customers are more insistent on understanding all the components of price, including the distributor’s cost from the manufacturer, freight costs, etc. That can present a dilemma for distributors. “Contractually, we’re bound with many of our manufacturer partners not to share our cost,” he said.

Some of the more integrated IDNs are demanding that suppliers extend acute-care pricing to their non-acute-care members, such as physicians offices. That demand is causing suppliers’ class-of-trade distinctions to crumble, said Barr.

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