Competitors of Columbia/HCA Healthcare Corp. could have at least one reason to thank the hospital giant: Its tough negotiations with suppliers could lower product prices throughout the hospital industry.
Late last month, the Louisville, Ky.-based chain announced the first round of purchasing contracts that it renegotiated after its recent marriage with HCA/Hos- Supplierspital Corporation of America. The result: in a one-year period, Columbia will pay $160 million for several categories of goods instead of the $220 million it would pay under previous contracts.
Eventually, Columbia expects to cut a total of $80 million from the $1.7 billion it would spend on supplies under current contracts, said Lee Wood, Columbia's director of investor relations. It tackled first the areas that promised to yield the greatest savings.
This is the chain's second attack on its supply contracts. After its merger last year with Galen Health Care, formerly Humana, Columbia saved $20 million to $30 million by rebidding contracts, Mr. Wood said.
Columbia's aggressive bargaining could translate into financial rewards for the whole industry, said John Runningen, an investment analyst at Atlanta-based Robinson-Humphrey Co.
Pressured by hospital customers, suppliers can't raise prices to offset lost business, Mr. Runningen said. Market share and operating efficiency will determine their economic strength in the coming years.
As fewer and fewer groups control more and more purchasing power, each contract gains importance. Companies will fight fiercely for Columbia's business. Firms that don't land Columbia contracts eventually might offer low prices to secure market share elsewhere, industry analysts said.
Also, purchasing groups and hospital systems that see Columbia get enviable prices might heighten their own efforts to win better deals.
Columbia's plan is straightforward:
It will use its size-197 hospitals-to command low prices.
It will try to make its hospitals buy on contract at least 95% of the time.
It will try to limit most of the products it uses to one or two brands. Product standardization and high contract compliance will help Columbia cut waste and inventory, as well as negotiate lower prices because it can promise more purchases.
It will try to control its hospitals' use of supplies. In the new contracts, for example, the suppliers agreed to judge salespeople not by volume sales but by how well they help Columbia meet its goals.
"When Columbia gets their act together and they're really synergized, they're going to drive tremendous pricing in the industry," said William McFaul, president of McFaul & Lyons, a Trenton, N.J.-based healthcare consulting firm. "They have enormous potential. But they're adding hospitals so quickly it's going to be hard to assimilate them."
Last month's contract awards tapped Bristol-Myers Squibb, Princeton, N.J.; E.I. DuPont de Nemours & Co., Wilmington, Del.; Johnson & Johnson, New Brunswick, N.J.; and Medline Industries, Mundelein, Ill. Owens & Minor, based in Richmond, Va., will distribute the medical-surgical supplies awarded. Terms of the contracts weren't disclosed.
The awards illustrate the fears that threaten to divide suppliers into two camps: those who will play with Columbia and those who won't.
Some suppliers don't believe they can make money at the prices Columbia wants. For example, Deerfield, Ill.-based Baxter International had handled some of the distribution business awarded to Owens & Minor. A spokeswoman declined to say how much. "The deal with Columbia was a pricing issue," she said. "We just didn't feel it was profitable."
Companies also fear that once they get Columbia's business, they won't keep it. For example, Rochester, N.Y.-based Eastman Kodak Co. won the contracts for radiology supplies when Columbia solicited bids after its merger with Galen. DuPont came away with the contract in the last round of negotiations. Spokeswomen for Kodak and DuPont declined to comment.
"We won't really know if (Columbia is) being heavy handed for a year," said Kenneth Abramowitz, an analyst with the New York brokerage firm of Sanford C. Bernstein & Co. "It really depends on how well the suppliers and Columbia work together."