The Distribution Dilemma

Survey shows materials executives would like one distributor, one price, for hospital and non-hospital sites. But can that really happen?

Your distributor wants to know: If your IDN is thinking about acquiring physician practices or employing physicians, will you insist that your acute-care distributor service these new accounts, or will you back off and let the non-acute-care distributor – whom you might barely know – continue to take care of that side of the business? Or will you choose a third path – self-distribution?

Physician office distributors won’t necessarily want to hear Gary Fennessy’s answer. “The less variability you have, the better off you’ll be financially,” says Fennessy, vice president of operations for Northwestern Memorial Hospital in Chicago. “When push comes to shove, I will always choose to go to one vendor, particularly related to distribution.” That said, he knows that the need to provide excellent service to his clinical customers will drive whatever supply chain decisions he makes.

Nor will physician-office distributors – or their acute-care counterparts – be crazy about Tony Johnson’s approach. His IDN – Novant Health, Winston-Salem, N.C., which owns a large medical group with more than 350 clinic locations – has been practicing self-distribution since 2005. “Our main driver was to consolidate the supply chain and leverage our size in the marketplace,” says Johnson, senior vice president.

Reasons to be hopeful
As IDNs get more aggressive about picking up physician practices, acute-care and non-acute-care distributors have reason to be hopeful … and apprehensive. Hospital distributors have an “in” with supply chain executives. They know and understand each other. They have a history. The problem is, many acute-care distributors lack expertise in distributing to non-hospital sites.

Non-acute-care distributors, on the other hand, lack the history and familiarity with hospital and IDN supply chain executives. What’s more, hospital-oriented materials professionals may fail to understand the challenges and costs associated with delivering in small quantities to scattered locations. But non-hospital distributors are optimistic that once materials management executives and CFOs take a closer look at what’s involved, they’ll see the wisdom of sticking with the suppliers who have serviced physicians for years.

Indeed, Johnson admits that supporting physicians’ offices, with their smaller order sizes and different ordering habits, is more complicated than supporting a big acute-care facility. Not only are the logistics different, but the attitudes too. “Initially, we thought it was all about cost,” he says. “What we learned was that it was about high touch and about [physicians] being able to choose what they want when they want it.”

Physician alignment survey
In its recently released “2011 Physician Alignment Survey,” MDSI (publisher of the Journal of Healthcare Contracting) reports that 85 percent of hospital and IDN supply chain executives surveyed said their hospital or IDN is actively acquiring or hiring physicians or physician practices.

Seventy-eight percent of the materials executives said they plan to maintain one prime distributor relationship to service both hospitals and non-hospital facilities, while 22 percent said they plan to work with two prime distributors – one to service acute-care facilities, one to service non-acute-care facilities. Ninety percent answered “yes” to the following question: “Do you believe pricing should be the same from your distributor(s) whether the products are going to acute- and alternate-site settings?”

Some distributors believe they are equipped to provide service to both acute-care and non-acute-care locations. Others do not.

“MMS is uniquely positioned to respond to these inquiries,” says Tom Harris, executive vice president, MMS-A Medical Supply Company, in St. Louis. “We currently service a number of IDNs with physician practices and other ancillary owned businesses – hospice, nursing homes, surgery centers, home care.” Sixty-five percent of the company’s business is acute care, and the remainder is focused on non-acute-care facilities.

“Historically, we haven’t chased the non-acute market,” says Marshall Simpson, senior vice president, sales and operations, Owens & Minor. “But we really feel – and we think materials executives do too – that if we keep doing what we’re doing and we see these trends continue, this is a scenario where the puck may come to both of us.

“As more health systems employ physicians, they may be asking us to bring the same disciplines we’ve brought to their acute care facilities to their non-acute-care facilities. They’re not clamoring at our doors, but the discussion is active and ongoing. It’s definitely a trend we see, and our customers see.”

Staying connected
The chance of non-hospital distributors attempting to service hospitals is next to zero. That said, they are making every attempt to stay connected with IDN materials executives and remain a vital part of IDNs’ supply chain strategies.

Bill Barr, vice president, healthcare services, Henry Schein Medical Group, says that even though Henry Schein has not re-entered the hospital business (a business it was once in, through its Caligor hospital division in the mid-Atlantic area), the company continues to work with materials managers to help improve their supply chains in non-hospital facilities.

“We certainly have to understand their pain points and expectations, and more important, what their specific interests are in this segment of their business,” he says. “From that, we need to offer quality service and solutions to help them meet their needs.”

McKesson Medical Surgical sold its acute-care business years ago, but the company remains close to that side of the business, says Doug Shaver, senior vice president of strategy and business development, McKesson Medical Surgical. “We’ve had an IDN program for a long time,” he says. “We have dedicated resources calling on hospitals to support their physician practices and other alternate site locations. So this is not new for us. I think we work pretty well with supply chain executives, typically the vice presidents of materials.

“We feel we’re well-positioned to help the hospital’s supply chain team support this unique internal customer.”

How different are they?
Shaver believes that once materials managers take a close look at what’s involved in servicing their newly acquired physician practices, they will conclude that their IDNs are best served by two suppliers – one for acute-care, one for non-acute-care.

“The spend, if you will, for these physician practices is approximately 1 percent of the materials manager’s total responsibility,” he says. “So the dollars we’re talking about are relatively small. Materials managers have huge responsibilities; they manage a very, very big spend amount; and typically, they have objectives every year to save their IDNs money. When you’re looking at 1 percent of the total spend, their total savings opportunity is minimal compared to the rest of the IDN’s budget.”

More important, most materials executives understand that servicing a physician practice is much different than servicing an acute-care facility, says Shaver. “Pulling an 18-wheeler up to a dock and unloading pallets is far different than servicing a $150 or $200 order for a doctor’s practice.

“Just as important is the fact that the buyers are very different. In a physician practice, their primary job is not to be a supply chain or purchasing professional, whereas in the hospital, that’s what they do for a living. So, not only are the logistics different, but the support needed is very different too. [The supplier must] ensure they’re getting the right products and maintaining the right amount of inventory.” That’s what non-hospital distributors do, he says.

Says Johnson, “The act of packing and shipping to the physician groups wasn’t really a challenge. What was a challenge was trying to approach it in a systematic manner. Trying to get them on schedules, so we could optimize our transportation, rather than [clinics] calling one day [with an order], and then calling the next day for a box of band-aids. If you can regiment a process, it would be a piece of cake.”

Another valuable lesson Novant learned some time ago was the importance of providing office managers in the clinics with good information at their fingertips. “We were trying to manage [the clinic locations] using an ERP system as their entry point into the supply chain, which is very complex,” he says. So, a year and a half ago, Novant launched a program to give the clinics an “amazon.com-like” experience ordering products.

“With ERP, the clinics were used to associating products with numbers,” Johnson explains. The problem was, if the materials department was unable to provide the exact product number, but perhaps one very close to it, the user might perceive that as a substitution, and there might be some pushback, even if the products were substantially the same.

“Today, if they want needles, they say, ‘I want needles,’” and the clinic sees a list of needles available and the price of each. “They’ve always had choice, but now they can see their choices,” says Johnson. “And they can see the pricing and make comparisons easily.” The program has been so well-received, that physicians are leading the implementation team. “That speaks volumes,” he says.

There’s an added benefit to the system, says Johnson. With more information, clinicians will make the most cost-effective product choices. “It’s hard for me to believe that when doctors tell the system they want an otoscope, and the one they want is one-and-a-half or two times more expensive than another one, they’ll choose the more expensive one. A formulary will basically create itself based on their decisions, because they have good information at their fingertips.”

One distributor or two?
Those materials executives who choose to stay away from self-distribution still must decide, “Do we go with one distributor or two?”
In the scheme of things, as hospital systems such as Northwestern work through issues of clinical integration, “distribution falls at the low end of the spectrum of issues I have to address,” says Fennessy. “So when you ask, ‘How do you feel about working with two prime vendors?’ I would say we would always try to work with one.” Having less variability and fewer points of contact are always desirable.

“But depending on the situation, it’s [more important to] make sure that at the end of the day, the service is being provided.”
Materials executives may very well conclude that having two distributors – one for acute care, one for non-acute-care – “isn’t a bad thing,” says Barr. “It’s the best of both worlds. They get the bulk deliveries they need [for their hospitals], and the low-unit-of-measure they require at [the clinic] level. And they get reps at each level who are very specialized and knowledgeable at what they do.”

What’s more, non-hospital distributors can help with implementation of electronic medical records systems and other revenue-generating activities. “Hospitals understand standardization and consolidation, and we can help with that.

“One constant will be change. My hope is that materials managers won’t try to force the different business models into one box, but instead, will really capitalize on the benefits of working with both.”

How do you price it?
The issue of pricing for acute- and non-acute-care facilities may prove to be a touchy one, at least for a while. Materials managers have a right to expect one price for products from manufacturers, regardless of where those products are consumed, according to those with whom the Journal of Healthcare Contracting spoke. But if they believe the distribution fee should be the same for delivery to both their acute-care and non-acute-care sites, they may have to change their perspective.

Fennessy concedes that the cost of servicing multiple small sites is greater than servicing fewer, but much bigger, ones. But everyone in the supply chain – providers and suppliers alike – is faced with cutting costs, he says. “Some blend of costs needs to be taken into account.”

Managing multiple distribution relationships with multiple fee structures can be cumbersome and expensive, says Fennessy. “So we try to simplify. And we have to work together to drive the cost down. You don’t have to be a rocket scientist to realize it costs more to deliver twice a day than once, or to deliver to five locations instead of one. At the same time, there has to be ways we can be more cost-effective.”

“Everybody has a basic understanding of supply chain distribution, but this is different than hospital distribution,” says Kenny Wilson, senior vice president and general manager, ambulatory care, Cardinal Health. Materials executives schooled in the acute-care supply chain may face something of a learning curve.

“It’s different because of the frequency and the size of the orders,” says Wilson. “I’ll describe it this way: If I’m a manufacturer doing an inservice for a hospital system, I go to five places. In this world, you might go to five hundred places. The level of complication, cost and ultimately, of driving customer satisfaction, makes it that much more difficult.”

Having an acute-care and non-acute-care component, Cardinal is in a good position to do just that, Wilson believes. “Having two or three partners is suboptimal. If we can have one common conversation and one common understanding, we can offer one vision in the marketplace.” The cost to serve hospitals and non-hospital sites will vary, says Wilson. “But one of the values we can bring is having a common product throughout the enterprise, and driving uniformity of a formulary throughout the enterprise.”

Says Harris, “When you’re delivering pallets on a regular schedule, and everything is transacted either by EDI or online, the supply chain is more effective and less expensive.” Breaking down cases, picking boxes, delivering them in totes, and delivering more frequently (because the physician’s office has less space), adds costs. What’s more, the people in charge of purchasing at most physicians’ offices lack training in supply chain, he says. They might call and tie up a customer service rep for a period of time. “There are costs involved in each of these steps.”

Making their case
Physician-office distributors must demonstrate that they are best equipped to service the IDN’s non-hospital sites, despite the increased cost-plus fee associated with doing so, according to distributors.

“It comes back to that interest level,” says Barr. “We’re hoping we can sit down and have a serious, focused meeting where we can talk about this business segment.” When that occurs, Barr delivers this message: The success of the IDN’s program to acquire and integrate non-hospital facilities will be measured not only in financial terms, but also in terms of physician satisfaction.

“Many physicians are joining hospitals so they can focus on patient care. If the supply chain becomes an issue, then they haven’t achieved one of their primary goals.”

In the end, distributors will no doubt find a way to service the new integrated entities that are cropping up across the country. MMS is an example. “We’re very opportunistic in our approach to medical distribution,” says Harris. “If there’s a market that exists, we try to find a way to service it. We see supply chain integration as a natural evolution. We’re excited about it.”

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