McKesson’s proposed acquisition of PSS would leave McKesson and Henry Schein as the sole remaining national physician distributors, though a host of independents continue to vie for the business
McKesson Corp.’s proposed $2.1 billion acquisition of PSS World Medical, announced Oct. 25, will change the landscape of physician distribution. If and when the transaction is completed, McKesson and Henry Schein will remain as the two national players in the physician market.
“The unified organization will bring extensive distribution capabilities, deep product and technology expertise and a broad portfolio of business services to an expanding industry, helping our customers improve efficiency and productivity, and deliver better care,” said John Hammergren, chairman and chief executive officer of McKesson, at the time of the announcement. But industry observers had some questions.
Repertoire magazine – a sister publication of the Journal of Healthcare Contracting, read by medical products distributors and manufacturers – asked a variety of industry professionals about the potential impact of McKesson’s acquisition on manufacturers, distributors and IDNs.
McKesson will face some challenges integrating two very different cultures, says one manufacturer. “McKesson is a large, structured corporation with many divisions and levels of management, [while] the PSS sales force has always been a more independent, entrepreneurial group. In PSS, sales is definitely king. Will the PSS salesforce feel the same in McKesson?”
Independent distributors may enjoy some opportunities as a result of the acquisition, says the manufacturer. “There will certainly be fallout for some vendors, and customers always like an alternative. The question will be if the independents can compete on prices and breadth of product. Can they get access to GPO contracts, etc? Henry Schein may benefit from this, and certainly Medline is well-positioned, as they have a IDN solution that McKesson does not.”
Impact on IDNs
The proposed acquisition means that physician customers may lose some of the benefits of having competing salespeople vying for their business, notes one vendor. “However, more and more physician business is falling under GPO/IDN, etc., contracts, so the competitive pricing issue may become a moot point. It will be the solution sets and services delivered that should be enhanced as a result of the combination of assets that McKesson and PSS can bring. McKesson and PSS have great expertise in providing product and services, and the addition of PSS’s abilities in that regard should be seen as a plus to the end user customer.”
The acquisition should position McKesson to significantly expand its business among IDNs, says another vendor. “They will be able to present a complete package to IDN systems to take care of their non-acute sites – physician office, surgery center, LTC, etc.
Says one manufacturers rep, “[T]he large and professionally managed end users will benefit from the McKesson acquisition. McKesson has positioned itself well to serve this customer in an efficient and transparent manner. The smaller end users will lose pricing leverage.”
The acquisition should position McKesson well for tomorrow’s consolidated market, the manufacturers rep continues. “They are going to be the alternate site market leader by far. I think hospitals will look to them as their logistics provider for their primary care business, and look to the hospital-based distributors to be their acute providers. Also, McKesson has traditionally serviced large alternate sites better than the competition, and in the consolidated market, these large multispecialty groups seem to be strong for the long haul.”
Independent distributors may suffer as a result of the acquisition, though enterprising ones may find a niche, continues the manufacturers rep. “If you look at the history of acute distribution, when it consolidated, the independents did not fair well. However, the independents that found a niche – i.e., equipment, respiratory, OR – figured out a way in many cases to survive and do well.” At the same time, though, “[there may not] be enough customers in the future that will be willing to pay more to be serviced by the independent distributor.”
And there’s a good chance the new McKesson will doggedly pursue efficiencies. “The current market and future market will not allow for the duplication and inefficiencies of lower producing reps and costly warehouses.”
Impact on suppliers
Small manufacturers may face challenges in the new environment, but small, independent distributors may find opportunity, adds one manufacturer. “The consolidation of the industry is bad for small manufacturers.” The cost to capture distributor reps’ mindshare can be more than small manufacturers can afford, and large distributors can use their computer systems to make some manufacturers – especially small ones – “invisible” to sales reps.
But small distributors may thrive, continues the vendor. “There are really two [national] companies in the whole country if this [acquisition] goes through, and that has to be positive for independent distributors. I think there are enough customers around that they can make a great living, [but] maybe not enough for a big public company to continue to grow.”
Notes another observer, “On balance, the merger should create opportunity for the independent [distributors]. An integration of the size and scope that is necessary in this case will consume a vast amount of resources for a long period of time. It is possible that the focus on the integration will present a distraction that in the short run might compromise customer service. [But] in the long run, the independents may be disadvantaged. If and when the integration is completed, the consolidated enterprise will, as a general proposition, be in a better position to service the consolidating provider market.”
Will McKesson follow up its acquisition of PSS to get back into acute-care, a market it exited in 2006? One vendor believes it might. “PSS says that part of the reason they purchased Infolab [the Clarksdale, Miss.-based distributor of clinical lab products] was to get into the hospital market. Perhaps McKesson will use that sales force to get back into the hospital business?”
McKesson’s acquisition of PSS will definitely affect the long-term-care market, says one distributor. “In the long-term-care or post-acute-care space, both organizations have private-label [incontinence] products that are the top-volume items. This will obviously affect the ‘losing manufacturer.’ Additionally, major product lines have limited manufacturers. Nutrition is an example, with Nestle and Abbott. Assume that one will be the lead product, especially with competitive bidding. For customers, it will mean less choice, but I would assume that with the volume increase, customers may see some cost reductions.”
Long-term-care customers could face a reduction of services from the new company, notes another distributor. “Doctors, hospitals and clinics may take precedent over long-term care. Service may be slower or compromised. New product introduction will probably take six months to a year. I believe it will affect long-term-care customers more than any other area of healthcare.”
In the opinion of a third distributor, “The long-term-care customers who moved away from McKesson and went with a new distributor, like PSS/Gulf South, may not necessarily welcome being reverted back to McKesson. This does, however, open the door of opportunity for other distributors. It’s expected that PSS/Gulf South long-term-care customers will be open to new distributor proposals as they review terms and contracts during this time of change.”
With all the challenges facing healthcare providers today, the acquisition finds long-term-care customers in a state of confusion, according to the distributor. “Justified or not this creates new opportunity for independents.” Examples:
- Existing contracts with long-term-care customers that might have been renewed with PSS/Gulf South will most likely be sent out to bid.
- Long-term-care groups or freestanding facilities that might have had a contract or distributor relationship with McKesson but switched to PSS/Gulf South within the last 12 months will be sending out more RFPs.
- “Consistency and strong relationships are key with long-term-care customers. With the anticipated change in field reps and territories during this acquisition, it’s another reason opportunities will arise for growth with the independent distributor.”
Manufacturers will be looking for other distribution channels to make certain that their products stay in the long-term-care/home care marketplace.
Options for physician distribution
With the proposed consolidation of McKesson and PSS, Journal of Healthcare Contracting readers still have options for distribution to their physician practices, surgery centers and other non-hospital sites.
Henry Schein Medical
Melville, N.Y.-based Henry Schein says that 16.6 percent of its net sales of $8.5 billion – or $1.4 billion – are in the physician office, surgery center and non-hospital markets.
In November 2010, Mundelein, Ill.-based Medline Industries acquired Canton, Ohio-based DiaMed, a physician supplier, bringing Medline’s total sales to physician practices to about $25 million. At the time, the company announced its intention to become a national physician supplier with a dedicated physician market sales force, though it has been quiet about is direction since then.
National Distribution & Contracting Inc.
Nashville, Tenn.-based NDC is an elective member service organization providing distribution, logistics and a full range of services to more than 300 independent medical, physical therapy, rehabilitation and dental product distributors. For a list of NDC members, go to www.ndc-inc.com.
Based in Daytona Beach, Fla. IMCO is a co-op for medical supply distributors in the physician, hospital, nursing home, home health, EMS industrial and other markets. For a list of IMCO members, go to www.imcoinc.com.