Recent mega-deals between medical-surgical suppliers and group purchasing organizations are a cause for concern for many integrated delivery networks. Industry mergers such as Cardinal Health and Allegiance Corp., McKesson Corp. and General Medical Corp., McKesson and HBO & Co., and VHA and University HealthSystem Consortium have dramatically changed the supplier landscape.
At first glance, these mergers offer lower prices for drugs and medical-surgical supplies, simplified purchasing through "one-stop shopping," more staff training and the opportunity for increased product knowledge. Yet many of these mergers do not really provide savings. In the long run, they could actually harm the healthcare industry. Let's examine why.
When an integrated delivery network considers who is supplying its hospital system and who will be bidding on its next contract, the field is narrow. Choices narrow even more when the major group purchasing organizations lock into long-term deals tied to product selection. Many of the medical-surgical distributors are pushing their own private brands to the exclusion of competitors'.
The selection of products is being taken out of the hands of the customer-the healthcare professional and the materials manager-and is being controlled by distributors and manufacturers.
The ultimate question is, are these deals in the best interests of healthcare as a whole? Here's a test. Does the merger:
* Improve service to the end customer?
* Create cost-cutting synergy for the supplier?
* Improve or restrict product choice?
* Solve or create customer problems?
In other words, who benefits from the merger-the customer or the stockholders of the merging companies?
Many negatives. Suppliers typically promise that administrative and operational consolidation will reduce costs. In fact, healthy competition improves service and reduces costs.
Another downside of these alliances is decreased product choice. Physicians should make choices that fit their patients' needs. Yet alliances let distributors and providers make choices for physicians. Instead of choosing the right product for a patient's needs, medical staff will use products the distributor and group purchasing organization tell them to use or risk losing the benefits of the group contract.
Distributor deals may achieve some efficiency and cost savings for networks, but distributors do not address the entire problem. Healthcare providers, especially delivery networks, are some 20 years' behind other industries in integrating their supply-chain functions: information systems, materials management, transportation and product handling, and warehousing. A typical hospital spends 38% of the cost of goods on moving and handling supplies, compared with less than 10% for most industries (from the 1996 study "Efficient Healthcare Consumer Response: Improving the Efficiency of the Healthcare Supply Chain" done by El Segundo, Calif.-based CSC Consulting).
Healthcare providers are becoming increasingly dissatisfied with distributor performance. Our research shows that order fill rates in the healthcare industry are less than 84%, compared with 90% to 97% in the retail and grocery industries. As a result, back orders and hospital inventory levels are greater than they should be. In the past, a hospital dissatisfied with a distributor could simply change vendors. Long-term contracts prevent that.
To avoid these pitfalls, networks need to ensure that health systems-not suppliers-control product choice. One way to do that is through third-party logistics providers, independent contractors who, on a turnkey basis, provide services such as warehousing, pick-and-pack, transportation and inventory management, and relevant information systems. These providers can help to re-engineer and to operate a network's supply chain-from the patient bed and the nursing station to the manufacturer.
Technological strides. Technology that is the norm for most industries-bar coding, hand-held scanners and computerized inventory management-is rarely available in hospitals, outpatient surgery centers and doctors' offices. Virtually nonexistent is the integration of these systems so that organizations can share supply-use data, produce accurate billing and predict supply needs.
The average hospital has three to six months of supplies on hand, whereas a retailer may have less than one month and a grocery store only a day. Technology can help healthcare organizations reduce inventory to less than three days' shelf time. Nurses with hand-held scanners could electronically deliver supply-use information directly to patient records. With one swipe, cost and usage information would be electronically transmitted to accounting, clinical and inventory management systems. The hospital would know when an item was used, for accurate billing, and supplies would be restocked automatically. Freeing staff from tracking down supplies would help them concentrate on patient care.
Dynamic model. As providers question the role of distributors and group purchasing organizations, networks may consider taking the distribution function in-house. The payoff is the elimination of middlemen's margins, rebates and fees. Still other networks may choose to outsource purchasing, distribution and logistics functions, just as they have outsourced laundry and food services.
Progressive networks will be looking to third-party logistics providers to help them save money, better use capital and integrate and streamline diverse operations.
Harvey Rickles is the director of Atlanta-based UPS Worldwide Logistics' Healthcare Group, which implements and operates customized solutions for the healthcare industry.