On a muggy April morning in Washington, Elizabeth Dole, president of the American Red Cross, held court over a celebrity-drenched party featuring the likes of Garth Brooks and even a former MTV personality named Kennedy to mark the 50th anniversary of the charity's mission in supplying blood to the nation.
Briefly noting the Red Cross' start in blood services during World War II, the springboard for a lasting civilian effort, Dole cut to the more immediate cause for celebration. The Red Cross is nearing the finish line of a seven-year, $287 million campaign to completely overhaul its blood services operation.
A former secretary of both the U.S. Labor and Transportation departments and an often-rumored candidate for president, Dole has steered a stem-to-stern makeover of the Red Cross, prompted by charges that it wasn't doing enough to safeguard blood in the age of AIDS.
"I've had to do some things that were challenging, like selling a freight railroad while I was at Transportation and settling a coal strike at the Labor Department," Dole says. "But this was the most challenging because it was wrenching cultural change."
The Red Cross had to change or leave blood banking behind. During the 1980s AIDS contamination rocked public confidence in the blood supply. And an exhaustive Food and Drug Administration probe that faulted the Red Cross for quality and safety problems culminated in 1993 in a court-enforced consent decree spelling out how the charity would have to transform itself.
Five years later, the Red Cross is nearly done with that behind-the-scenes work. It has gone from a patchwork of autonomous blood centers with little in common except a familiar logo to a tightly centralized outfit that looks and feels more like a drug company.
In the meantime, the risk of contracting AIDS from Red Cross blood has dropped to nearly one in 700,000-more than a threefold improvement from 1991.
Blood wars. While the Red Cross' blood is safer than ever, its balance sheet is sick. That has set the stage for the latest challenge: returning the Red Cross to financial health.
In response, the organization has launched an ambitious campaign to dramatically increase its piece of the more than $2 billion business of supplying blood to hospitals.
And its quest for market share has sparked what some participants call a "blood war." At odds are the Red Cross' ambitions for national dominance against the survival instincts of its main competitors, a mosaic of independent, community-governed blood banks affiliated under the banner of America's Blood Centers.
"I don't mind competition," says Byron Buhner, an ex-Marine who is president of ABC and president and chief executive officer of Central Indiana Regional Blood Center in Indianapolis (See Outliers, p. 40). "But I don't like it when the overriding motive is to try to eliminate local blood centers."
Many hospitals, which are the prime customers of the blood organizations, hail the change.
Competition in the blood business is new but already has lowered prices in several cities while improving service.
Linked to the fight for market share, however, is an equally pitched battle for the hearts, minds and veins of the donors who make it all possible.
Some longtime blood bankers fret that overheated competition may dishearten donors to the point of apathy.
Pressure to contain costs at hospitals set the stage for a change in the way blood has been supplied. Although many hospitals spend millions on blood each year, the financial spotlight shone brighter on other expenses until recently.
"As hospitals have become conscious of lowering their costs, they're looking to alternatives, and a number of them are turning to us," Dole says.
But there's also little doubt a newly aggressive Red Cross is accelerating the shift in thinking. Perhaps the best-known charity organization in the country, the Red Cross has set its sights on a 65% share of the market for blood services by 2001 compared with its current 46%. ABC claims about a 47% share of the market. Hospital blood banks account for the remainder, about 7%.
In the red. In its quest for money the Red Cross is going after new customers and new blood donors to feed them. Ink in its ledger books is running as red as blood.
The Red Cross' rebuilding campaign was expensive. "Transformation" with a capital T, as Red Cross employees refer to the process, swallowed $287 million. The charity spent between $170 million and $180 million on computer systems and software alone and an additional $50 million to $60 million on eight highly automated regional testing laboratories. The result is the only nationally integrated blood supplier.
Stepped-up charitable donations to the Red Cross covered only a fraction of the retooling costs. The rest was put on an installment plan. All told, the Red Cross' blood services unit is about $300 million in debt, to be paid down over the next five or six years.
Debt and the cost of running the new operation have taken a heavy toll. At its financial depths in fiscal 1995, the Red Cross' blood services unit ran a deficit of $113 million on revenues of $937 million. Last year the unit was in the black by $5.7 million, the Red Cross says, but operating revenues of nearly $1.1 billion still fell short of expenses by $81 million.
"One of the business imperatives for (the blood services unit) is to move the organization into a more financially stable position," explained an article in a Red Cross newsletter last year. "One strategy to increase revenues is to expand marketing efforts into areas not traditionally served by our blood services program."
Breaking monopolies. Regardless of the suppliers' motivations, hospitals welcome even the whiff of competition for their blood business. With a few exceptions, most parts of the country have been served either by an independent blood center or the Red Cross, but not both. The mutually exclusive patchwork is a vestige of history and a federal blood-banking policy dating back to the 1970s that essentially endorsed local monopolies as the best way to procure and distribute blood.
But many hospitals beg to differ with that approach. These local blood fiefdoms, they say, have left them with few options for pursuing better prices and service. Dramatic regional differences in blood prices have fanned hospital discontent. A unit of the same red blood cells can cost less than $60 in Florida, about $105 in upstate New York and as much as $150 in Massachusetts.
Despite the public perception, blood is far from free. The suppliers mount expensive drives and levy fees on their hospital customers to cover the costs of collecting, processing, testing and distributing the myriad products derived from each pint of donated blood. On the other side of the ledger, each pint of blood brings about $200 in revenues for the blood supplier, once it is divided and concentrated into red cells, plasma, platelets and a variety of specialized factors.
Staying local, going national. The key element of the Red Cross plan is to recast blood services into a national business, matching regional supply and demand across the country. That plays to the Red Cross' strength since it transformed itself into a centrally organized provider with national reach. The charity says its strategy is a natural reaction to consolidation among hospitals into regional and even national systems.
"We believe we serve the public well by balancing the supply of blood with the demand for blood in our country," says Brian McDonough, chief operating officer for Red Cross Biomedical Services, which includes the blood services unit.
Seeking a one-to-one match between needs and donations at too narrow a level, he says, is "simply dysfunctional."
So the Red Cross is out to become a player in every market-and fast.
"By February 1999 we'll be in all regions of the country," McDonough says. "That's been a driving timeline around here. That's relentless. By 2001 we'd like to be 65% of the market."
But independent blood centers threatened by Red Cross expansion emphasize that when it comes to the blood supply, community trumps commodity. "The raw material here is from a human being; it's not natural gas or oil coming out of the ground," declares Jay Menitove, executive director of the Blood Center of Kansas City.
Two years ago the Red Cross entered Kansas City and has since scratched out about a 5% share of the local blood market. Though modest, the Red Cross' breakthroughs in Kansas City, Dallas and Phoenix represent the thin end of the wedge of its national plan.
Echoing the debate over how organs for transplant should be distributed, many independent blood centers say the public health stakes are too high to allow a change in blood distribution to unfold without planning.
"What we've seen with blood is a de facto policy that one group established without national discussion," Menitove says.
But the calls for a policy debate amid hand-wringing by blood bankers is peanuts to hospital customers who say blood suppliers must change now. "It comes down to economics," says Ila Peterson, M.D., director of the blood bank at Overland Park (Kan.) Regional Medical Center, which spends $400,000 a year on blood products. "We can knock 15% off our blood supply costs just by picking up the phone and calling the Red Cross. My administrator's ears prick right up when he hears that, and he says, `Well, go out and do that.' "
So 287-bed Overland Park did. The Columbia/HCA Healthcare Corp.-owned hospital threw its business to the fledgling Red Cross operation in Kansas City last year. Costs are down and service quality is up, Peterson says.
She has little sympathy for blood suppliers' whining about competition, given the daily struggles in the hospital business.
"My hospital and every other hospital might get 50% of what we bill a patient," she says. "I think, `Tough. You guys are being given this product for free. You give (donors) a glass of juice and a cookie. What more do you want?' "
Not all the independent blood centers see the Red Cross as a bogeyman. "Competition doesn't have to be bad," says Ken Wiebeck, marketing director for Florida Blood Services in Tampa. "Competition can spur you on to better things. If you have a monopoly, it can cause you to get lazy and fail to see opportunities and take them. Can it be nasty? Absolutely. You can have terrible blood wars."
Through relentless marketing to donors, Florida Blood Services, for instance, has collected more blood than it needs locally and is exporting the excess at a tidy profit to hospitals in New Jersey, New York and North Carolina-all Red Cross territories. Those out-of-state profits help keep local prices down, Wiebeck says, and they keep Florida Blood Services on its toes.
"If you're doing your job right, you have nothing to worry about," he says.
Another battleground. Like Kansas City, Dallas-Fort Worth is another brewing battleground between the independent blood centers and the Red Cross, which staked a claim there in 1996.
Over the past two years, the Red Cross has wrested nearly a dozen hospital accounts from Carter BloodCare, the independent blood center serving the metropolitan area.
One of them is 374-bed Methodist Medical Center in Dallas. James Langley, M.D., director of transfusion medicine there, says the switch has cut his blood costs 10% to 15%. And competition has lowered prices in the market overall, he says, benefiting all hospitals-even those that stayed with Carter.
Although the Red Cross has about a 5% share of 200 or so hospitals in the greater Dallas-Fort Worth market, that isn't what worries Merlyn Sayers, president and CEO of Carter.
The real battle, he says, is over donors. The Red Cross already has come between Carter and prominent local corporations, such as Exxon Corp. and Frito-Lay, by suggesting the companies evenly split their blood drives between the two suppliers, Sayers says. That's a pretty cheeky proposition, he says, considering the 20-to-1 difference in the amount of blood they supply to local hospitals.
To protect Methodist's donor base, Sayers is reminding area companies about their historical ties to the locally governed blood center and has spent $500,000 on a media campaign to build donor loyalty.
What the Red Cross' entry into Dallas and other cities has done, Sayers says, is "put the spotlight on whether the community wants to be served by an organization that is subordinate to a national policy or one that is directed by community leaders."
But Methodist's Langley sees it differently: Competition is about consumer choice. "I'll be the first to say I'll look at other alternatives now that I have alternatives," he says.
Unhappy customers. Without doubt, the blood suppliers have gotten the message about customer discontent.
"For a while we were immune because blood was considered sacrosanct, and we just kept passing our costs along," concedes James MacPherson, ABC executive director.
But those days are over, he admits.
"The competition has been wrenching for us, but it has helped at least in holding (down) prices and providing more alternatives and better service," MacPherson says.
But the squeeze on independent blood suppliers has pushed many of them deep into the red from barely breaking even. An already weak industry is being driven to the financial brink, MacPherson says. He frets that a combination of the Red Cross' deep pockets, which his members don't have, and aggressive strategy to enter every market could trade short-term savings for a heavy future price.
"If you knock us out, we're gone," MacPherson says. "Then you're subject to a monopoly-that's what's going on here."
Taking risks. Despite the theoretical advantages of its brawny national organization, however, the Red Cross isn't coming up roses everywhere. In many cities, the Red Cross is the virtual monopoly local hospitals would love to break.
"In this area I see a lack of blood suppliers willing to take on (financial) risk," says Gint Taoras, executive director of the Laboratory Alliance of Central New York in Syracuse, a Red Cross stronghold.
Taoras runs the consolidated clinical laboratories and blood banks for a consortium of hospitals including Community-General Hospital of Greater Syracuse, Crouse Hospital and St. Joseph's Hospital Health Center, all of Syracuse. The consortium pays the Red Cross $5 million a year for blood services.
"I can't understand the cost of blood here," says Taoras, who held a similar job in Fort Myers, Fla., until last year. A unit of red cells from the Red Cross in Syracuse costs about $105, Taoras says, a far cry from the $60 or $65 he paid in South Florida, one of the nation's most cutthroat markets. "If you don't have any competition, you'll have what you see here," he concludes. "Managed-care pressures are always on hospitals and providers to manage costs," Taoras says. "As a customer, I don't see that the Red Cross as a vendor should be any different."
Blood as commodity. One reason hospitals are restive is blood products are essentially commodities. FDA regulations and inspections require each blood supplier to perform the same tests for contamination and to conform to the same quality standards.
"A blood product is a blood product is a blood product," says Robert McDaniel, who contracts for blood services at Santa Barbara, Calif.-based Tenet Healthcare Corp. "To be honest, I don't care who we use, but I catch heck if it doesn't work."
Service is paramount, but cost does count. And Tenet, like other growing hospital systems, is testing the power of consolidated purchasing to contain blood spending. This month, for instance, Tenet inked a supply contract with a consortium of independent blood centers to serve 14 of its Texas hospitals.
Other hospitals are turning to in-house blood banks to curb blood expenses.
Take, for instance, 369-bed Saint Vincent Hospital in Worcester, Mass., which spent nearly $800,000 on blood services for the 11 months ended in April. "We could continue and look at escalating costs and uncertainty or take the bull by the horns," says Jeffrey Ashin, COO of the Tenet-owned hospital.
Saint Vincent chose the latter approach and contracted in March with Alpharetta, Ga.-based Coral Therapeutics, a blood banking specialist, to beef up the hospital's in-house effort.
Within three years, Saint Vincent should be able to supply 25% to 35% of its own needs, Ashin says. And the self-operated approach should pay off in both cheaper blood and closer ties to the community.
Helping themselves. Other hospitals are trying a blend of self-sufficiency and savvier contracting to cut blood costs.
The 136-bed Roswell Park Cancer Institute in Buffalo, N.Y., has done an end run around the Red Cross by beefing up its own blood banking and contracting for the rest of its needs with Wiebeck's Florida Blood Center in Tampa.
Roswell Park is a prodigious consumer of blood platelets, used in large quantity to treat cancer patients. The most expensive blood fraction, platelets would set back Roswell Park more than $500 a unit if it bought them from the Red Cross. But Roswell Park capitalized on Buffalo residents' penchant for blood donation and in two years has become self-sufficient in platelets.
The savings have been tremendous. In 1997 Roswell Park shelled out $1.2 million on blood services, scarcely a third of the $3.5 million it spent in 1995, when the hospital depended on the Red Cross.
The Red Cross' national reorganization made the decision to break away even easier, says Rick Holden, administrator for pathology and laboratory medicine at Roswell Park. Most of the Red Cross blood infrastructure in upstate New York is moving 150 miles to Syracuse, he says.
"If they're going to be that far away, there isn't a lot of difference from getting blood from Florida," he says.
Bad blood. Beyond the dollars and cents, the blood wars have soured relations among blood bankers, a quirky but until recently collegial bunch.
Things have deteriorated to the point that blood suppliers recently turned to a marriage counselor of sorts for help. Last year, the Red Cross, ABC and two blood banking societies formed a working group called the Harvard Blood Forum to air their differences.
"Conflict is a naturally occurring phenomenon in healthcare," counsels Leonard Marcus, a lecturer at the Harvard School of Public Health and the professional mediator who facilitates the blood confabs. "Better to have them sit down and talk face to face than otherwise."
Not much better, counters ABC's MacPherson: "This is as bad as putting the Arabs and the Israelis in the same room."
And that's a sea change for the blood bankers whose professional calling as stewards of the very stuff of life had previously dissolved any barriers of affiliation.
"We used to have a very collegial relationship," MacPherson says, but "we haven't been able to talk to one another. There's so much hostility that there isn't any dialogue anymore."
So the Blood Forum would like to develop "rules of engagement" for donor recruitment that would keep the donors above the fray, MacPherson says.
More than a petty dispute, many in the blood business fret that the internecine fight for market share ultimately could alienate the people who make the enterprises possible. Only about 5% of eligible people actually give blood.
"The sad thing about it is if donors say it's all about money, they may decide not to donate," adds ABC President Buhner. "That's my biggest fear. We have to preserve at any cost the donor base."