Princeton University healthcare economist Uwe Reinhardt says he has the scariest Halloween card ever to send to the Health Industry Manufacturers Association.
It shows Robert O'Leary, Alan Weinstein and Ben Latimer on the cover of MODERN HEALTHCARE boasting of their new hospital alliance that would exact from vendors at least $400 million to $500 million in annual price concessions (Nov. 27, 1995, p. 2).
Now, the first contracts of the new company, Premier, are out-and ringing like a gunshot.
Those contracts cover diagnostic imaging film and contrast media-substances injected into patients to aid imaging.
"As a result of what the new Premier has done on film and contrast media, you can absolutely, positively expect those markets have radically changed," said David Roesler, senior vice president of Purchase Connection, Los Angeles, a competing purchasing group.
"On the film piece, you can look for a 5% to 10% decrease in prices overall as the film companies respond. On the contrast side, I believe it will be more significant," Roesler said.
The Premier contracts represent a high-profile test of a recent trend in supply purchasing-committed buying. They are a test of Premier, too, because success here could buttress future efforts, while failure could erode hospitals' and vendors' faith in the alliance.
Premier was formed earlier this year by a merger of three hospital alliances. It is the largest private purchaser of goods for hospitals, with contracts worth $10 billion annually.
Committed buying describes programs in which groups obtain promises from members to make a certain percentage of purchases under contract. Hospitals frequently buy off-contract for a variety of reasons. Many groups are pushing committed buying as a way to cut supply costs in the face of rising competitive pressures.
Premier is the most visible advocate of committed buying and, some observers say, the most hard-core.
What Premier did was take its 1,700 hospitals and pledge the bulk of their X-ray film and contrast-media purchases to the lowest bidder.
"This is the first guy on the block who rose and said, `It's only price. We don't care about (services).' Even Columbia/
HCA (Healthcare Corp.) hasn't had vendors parade like this," said Tom Colucci, a marketing executive at Agfa, a film manufacturer with U.S. headquarters in Ridgefield Park, N.J.
The results were announced with great fanfare in March at Premier's first major gathering, which featured healthcare celebrities such as Reinhardt.
A "blockbuster" seven-year contract for medical-imaging film with DuPont Diagnostic Imaging will save hospitals an average of 27% to 36% of previous spending, Premier said. An "unprecedented" five-year deal for contrast media with Mallinckrodt Group and Berlex Laboratories will mean average savings of 12% to 31%.
In return, DuPont will get at least 80% of Premier hospitals' film purchases, or $225 million annually. Mallinckrodt and Berlex will get at least 70% of contrast media purchases, or $190 million annually.
Many Premier hospitals still are deciding if they can meet those terms.
The film contract is an easy call for Children's Hospital of Philadelphia, since the 304-bed facility already uses DuPont film.
Contrast media is a different story. The Premier contract means significant savings, but Children's radiologists now use other products. Because contrast media are injected into patients, brand changes "are a more difficult sell," said Terrence Carney, the hospital's senior director of support services.
He plans to discuss the matter with radiologists and cardiologists in the next few weeks. Children's is required to meet contract terms unless the products aren't acceptable clinically.
Noncontracted vendors reportedly are hurrying to cut prices so they don't lose other customers.
Most major manufacturers declined to comment. Agfa's Colucci said: "We really have been a low-cost provider, but we do expect the premium-price product in terms of X-ray film will erode."
Competing purchasing groups also are re-evaluating the market.
Several declined to comment for the record. Speaking privately, one competitor said the Premier contracts "destroy anything else in the market."
The average savings are based on members' previous spending for film and contrast products under the old alliances' contracts, said John Strong, senior vice president of the Premier buying group. He declined to disclose the actual discounts and other terms.