Hospitals so desperately want to cut supply expenses that they're willing to pay a steep price to do it.
They plan to hack away at expenses even more vigorously this year with drug formularies, purchasing groups, product standardization and sole-source, long-term contracts.
But paying lower prices for fewer products has a downside for hospitals. It's likely to force more consolidation among suppliers, and that will eliminate some competition, a tradeoff many hospitals consider necessary right now but may later regret.
Several forces are lined up to drive consolidation among hospital suppliers in 1996.
First, buying power is being concentrated in fewer hands. For example, there's the new alliance made up of AmHS/Premier and SunHealth. The group will control about $10 billion in annual hospital supply purchases, making it the largest private purchaser of hospital supplies.
It wants vendors to know its contracts mean significant actual-not just potential-sales. So it will craft more long-term, sole-source contracts and require member hospitals to buy more goods through them. If size and a "committed volume" emphasis win it lower prices than other groups, competitors will be pressured. One possibility: more buying group mergers.
Second, a number of groups besides AmHS/Premier and many large hospital systems like the idea of long-term, committed contracts. Sometimes they pitch "strategic partnerships," a still fuzzy phrase that in essence means longer-term, more committed contracts.
The results: Some suppliers lose big, profit margins fall, and the supply industry is ripe for more consolidation. Remember, the recent cascade of drug company mergers is due, in part, to the growing concentration of drug purchases in the hands of pharmacy-benefit managers and HMOs.
Consolidation could produce economies of scale that support lower prices and better service under those long-term, committed contracts. But it also will alter the balance of power between sellers of supplies and buyers, not always to hospitals' liking.
Consider supply distribution.
The field has consolidated so extensively in the last five years that only three true national medical-surgical distributors remain, and they handle about 70% of all hospital medical-surgical distribution. This is due to changes in hospital purchasing. For example, hospitals wanted deliveries from one distributor to streamline purchasing, and national buying groups wanted contracts with national firms.
Some hospitals now are wishing for more competition. They're unhappy because distributors are raising prices to support newer services, such as frequent deliveries, and dropping suppliers from inventories.
Many hospitals accept these steps. What really bothers some is they have no choice but to go along.