Observation Deck: In Your Hands

What does McKesson Corp.’s sale of its acute-care med/surg distribution business mean to you and the healthcare supply chain landscape at large?

First, on the face of things, it would appear to be a loss of competition. With this one transaction, Owens & Minor stands to gain $800 million or more in annual revenues. For a company whose total revenues currently stand at about $4.8 billion, that’s a gain of more than 16 percent. Loss of competition is usually a bad thing. It can mean domination of a market by just a few players; higher prices tend to follow. And yet, maybe the outlook isn’t so gloomy.

Although consolidation has taken its toll on acute-care med/surg distribution, the fact is, there remain some strong, service-oriented independent distributors (not to mention the behemoth, Cardinal Health). Just look at the 17 acute-care med/surg distributors (now 16, with the loss of McKesson Medical-Surgical) who recently signed contracts with Novation. Included are 1) strong, established players who provide good service in narrowly defined geographic regions, 2) at least one old-school, large regional player (The Burrows Company), 3) a rapidly growing regional player in St. Louis-based MMS (which, in March 2006, bought the Caligor Hospital Division and Extended Care Division from Henry Schein, bringing MMS’s projected annual sales to $325 million), and 4) Medline Industries, the manufacturer/distributor whose annual revenues now exceed $2 billion. IDNs still have choices; and these independents are hungry to prove themselves.

Second, McKesson’s sale of its acute-care med/surg distribution business draws into question the value to IDNs of the so-called “one-stop shop” for distribution — that is, a combined med/surg and pharmaceutical offering, and a combined acute-care and non-acute-care offering. Was this McKesson’s failure to capitalize on an opportunity, or was it a reflection of the market’s lack of interest in the one-stop shop? Maybe a little of both. Certainly, with annual revenues of about $75 billion, Cardinal Health seems to be pursuing a successful one-stop-shop strategy.

In the end, perhaps the hospital med/surg business just wasn’t that important to McKesson. After all, the company’s annual revenues stand at about $80 billion; a mere $1 billion is a drop in the bucket. The company continues to stand by its wholesale drug offering, its extensive hospital IT offering, and what it sees as more profitable, more promising opportunities in the non-hospital med/surg business. And the fact is, few if any IDNs are expected to drop McKesson’s drug wholesale, IT or non-hospital business because of the company’s sale of its hospital med/surg business.

Despite the fact that close to $1 billion of business just changed hands, JHC readers are left to ponder many of the same issues they have had to consider in the past. Do you prefer the home-grown approach of the local supplier, or do you prefer the backing that only a national company can provide? Do you value the simplicity and economics of the one-stop shop, or do you prefer to use multiple suppliers, each with its own niche in your supply chain? The choice is still yours.

About the Author

Mark Thill
Mark Thill is the Editor of The Journal of Healthcare Contracting and has been reporting on healthcare supply chain issues since 1985. He is a graduate of Dominican University in River Forest, Ill., and he received a master's degree in journalism from Northwestern University in Evanston, Ill.