Supply chain slant

Cardinal Health intends to bring its distribution model to products that have traditionally been considered physician-preference

Cardinal Health intends to use its extensive sales and distribution expertise, its RFID technology and its presence in 85 percent of the nation’s IDNs to become the low-cost provider of what traditionally has been considered physician-preference items.

In July 2012, the company launched Orthopedic Solutions, intended to bring fair-priced products, supply chain services and data analytics to this segment of the market. In support of the offering, Cardinal Health announced an exclusive distribution agreement with Emerge Medical, a provider of trauma products, including cannulated screws, drill bits and guide wires. The company said it would make those products available at a 30 percent to 50 percent savings over other currently available products.

In April 2014, Cardinal Health announced its intention to acquire AccessClosure, a manufacturer and distributor of extravascular closure devices. “Last year we launched our orthopedic trauma solutions to great response,” said Don Casey, CEO of Cardinal Health’s Medical Segment. “This acquisition will broaden our offering in another physician preference category.”

The two transactions are part of a broader strategy, says Casey. Cardinal Health aims to bring its shared distribution model and its information-enabled distribution system to products that have traditionally been considered physician-preference, but that have not seen a great deal of innovation or clinical differentiation over the past 10 to 15 years. By doing so, the company believes it can give its IDN customers “a whole new way of looking at physician preference items,” he says. “We think you can give great patient care at significantly lower prices.” Three areas of interest are orthopedics, interventional cardiology and wound care.

PPI vendors may push back, he says. But in the end, the PPI market may witness the same evolution as the pharmaceutical industry. History has shown that as Rx patents expire and generics manufacturers grab market share, Rx firms focus their attention on new pharmaceuticals, he says. “We haven’t seen that same evolution in the medical device space.” But chances are, the medical industry will.

“Over time, where there hasn’t been a lot of innovation, we think there’s an opportunity to bring value into the equation.” That will cause the manufacturers of PPI to turn their attention “upstream,” that is, at innovative technologies, while companies such as Cardinal Health brings to market lower-cost, but equally effective technologies. “The benefit to the ecosystem – healthcare systems and medical device manufacturers – is that by freeing up money on these less innovative areas, manufacturers can finance more innovative products upstream.”

The time has come?
The timing may be right for a new approach to the clinician preference market, says Casey. That’s because decision-making is undergoing a transformation. “Five to 10 years ago, 30 percent of physicians were employed by IDNs or hospitals,” he says. “Today, the number is pushing 60 percent.” No longer are decisions made solely on the basis of what the doctor prefers. Instead, materials management professionals and clinicians make decisions jointly. “Not only is the therapeutic value [of an item] understood, but so is the economic cost associated with it.” And Casey believes a company like Cardinal Health can have a lot of impact on economic cost.

“We have invested a significant amount of money on a shared distribution network,” he says. “And we have bought an RFID company that will make information available in that distribution network.” That makes things less expensive and easier to manage.”

In February 2014, Cardinal Health announced its acquisition of WaveMark, whose RFID technology helps the distributor and customer track items as they come in and are shipped out or used; record lot numbers and expiration dates; and track usage and current inventory levels. The acquisition will help Cardinal make inroads in the former physician-preference area, says Casey. That’s because traditionally, these product and devices areas lacked “natural demand signals” that go back to the manufacturer, and a methodology to establish dating and the amount of inventory in the system. “We think we can lower the aggregate amount of inventory, depending on capacity, and set up a far more efficient manufacturing [system] by creating real demand signals.”

Cardinal Health believes it can also bring a lower-cost sales model to the process. “A significant number of IDNs are moving away from the traditional model in orthopedics, interventional cardiology and other areas, where the [sales] rep played an integral part not only in managing the inventory, but helping manage the back table and helping the physician [during the procedure]. They are looking to create a different model. They’re saying, ‘Send me the product, baseline its price, and we will discuss whether we want to buy inventory services from you, training services, etc.’”

Better data analytics will help. Providers have a good idea of how much money they’re spending on items, but not necessarily when they’re spending it, says Casey. Nor is their information timely or complete. A productive hospital might perform four hip procedures in a given day, and they will know that. But its accounting system might not tell them how many tools were used, or how many pieces were left unused. “There isn’t a manufacturer [of physician-preference items] in the country that would tell you they have a good, accurate handle on product flow and timeliness in the system,” he says. Contrast that with the consumer industry, where companies like Wal-Mart know when a bottle of Benadryl moves off the shelf, at what store, at what time, and at what price the customer paid.

“This is the beginning of creating an electronic data flow around product movement in the physician preference space,” he says.