Recent actions by the nation's top two hospital-supply distributors foreshadow big changes for the marketplace.
Earlier this month, the proposed merger between Richmond, Va.-based Owens & Minor and Greensburg, Pa.-based Stuart Medical passed antitrust scrutiny.
Only shareholder approval and financing stand as potential stumbling blocks to the creation of a larger-and presumably more competitive-company in April.
Meanwhile, industry giant Baxter International this month began selling its products and services to hospitals through a consolidated sales staff instead of through salespeople representing individual product lines and divisions.
If successful, the shift promises to benefit hospital executives who will be able to buy Baxter's diversified products and its distribution services through one contact. The consolidation also will let Deerfield, Ill.-based Baxter sell and distribute, eventually under capitation, products that have been packaged for particular procedures.
Both actions set the stage for more competition between the two companies and possibly less from smaller, regional distributors, said Lawrence Marsh, an analyst at Richmond, Va.-based Wheat First Securities. Owens' acquisition of Stuart will create a $2.2 billion company that's now able to serve hospitals in every state. Under the deal, announced late last year, Owens will buy Stuart for $40.2 million in cash and $115 million in stock (Jan. 3, p. 10). It also will refinance Stuart's $140 million in debt.
This is the second time in a year that Stuart has been for sale. In February 1993, merger negotiations between Stuart and Baxter were dropped because of "cultural and financial issues" (March 1, 1993, p. 3).
The new Owens company will approach Baxter in the size of its distribution business. Combined, Owens and Stuart control about 27% of the $9 billion market for distributing medical-surgical supplies to hospitals, Mr. Marsh said. Baxter has 35% of the market.
By contrast, Richmond, Va.-based General Medical Corp., now the third largest distributor, has a 7% share of the hospital market, Mr. Marsh said.
"The merger with Owens has very much a strategic focus," said Richard Byington, Stuart's president and chief executive, who will join senior management at the new company. "Both companies needed a national presence."
In the past few years, national purchasing groups, hospital chains and many individual hospitals have been limiting the number of distributors with which they work. Such steps are believed to cut costs because hospitals no longer must deal with as many trucks at their loading docks nor as many variations in order forms and billing.
The use of fewer distributors, particularly at national purchasing groups and hospital chains, is making it more important for companies to be able to distribute anywhere in the country, Mr. Byington said. The merger means the new company will reach more hospitals with more ease, he said. That will let it shift resources to meet the needs of emerging healthcare networks, he said.
For example, the larger Owens might create contracts that give it financial risk or distribute to alternate-site facilities in networks.
"I think the merger is a good thing," said John Gaida, vice president of support services at 751-bed Brigham and Women's Hospital in Boston. "I'm looking for real head-to-head competition. I now have someone who can say, `Wait a bit, Baxter.' Not to knock Baxter-they're doing a fine job for us-but competition is what keeps the price down."
Coordinated sales. Meanwhile, drastic changes at Baxter promise a good dose of upheaval for the marketplace.
First, the company reshaped its sales force into teams representing each division, including distribution, which will work as a unit with hospitals. Second, Baxter actively began telling customers about experiments in which it delivers to hospitals products that have been packaged by procedure.
"Hospitals are saying, `I don't want to see 14 different representatives from Baxter,"' said Darrel Weatherford, assistant vice president of materials management at Westchester, Ill.-based Premier Health Alliance. "Short term, it might be a bit disruptive because they're making representative changes and they're downsizing."
Coordinating sales gives Baxter an edge against its distribution competitors, which can offer only that service, said Lester Knight, executive vice president of the hospital supplier. The move also lets Baxter develop new ways of pricing and packaging products, Mr. Knight said.
In one project that's involved 20 hospitals, Baxter delivers to hospitals products that have been packaged by procedure. In a more complicated project involving seven hospitals, Baxter works with the hospitals to standardize products used in procedures and then packages and distributes them that way.
By year-end, it plans to offer hospitals the first service. Sometime later, it will offer the second in a capitated package, Mr. Knight said. "That will be the ultimate product the account manager will sell for Baxter," he said.
At 278-bed Seton Medical Center in Daly City, Calif., which is involved in the second pilot project, 5% to 10% of medical-surgical supplies have been converted to standardized procedure-based packages. Nurses in labor and delivery, for example, reach for packages labeled "epidural," "caesarean," and so forth. The packages contain only enough supplies for the procedure. Panels of nurses, materials managers and other interested parties picked the supplies that are used, said George Ryan, director of materials management at the hospital.
Mr. Ryan said Seton has cut about $500,000 out of its $20 million annual medical-surgical supply budget since it began working with the packages a year ago. That's because fewer products become outdated or are wasted.