Kaiser Permanente has dropped its $525 million contract with Owens & Minor for medical-surgical supply distribution, marking the second time that the supplier has reported a major contract loss in less than a year.
The Richmond, Va.-based publicly traded company said that a “large national healthcare provider customer” recently declined to renew its contract. Owens & Minor didn't disclose the name of the health system, but Oakland, Calif.-based Kaiser Permanente confirmed that it had dropped Owens & Minor and signed a new distribution contract with Dublin, Ohio-based Cardinal Health.
Owens & Minor didn't immediately return a request for comment. Baird analyst Eric Coldwell initially identified Kaiser as the customer in a note this morning. O&M shares declined after opening Wednesday at $38.34, down from Tuesday's closing price of $41.19.
O&M reported during an earnings call last summer that it had lost a different unnamed customer worth just over $200 million. Those two losses amount to $725 million this year, representing 7.4% of the company's annual revenue in fiscal 2015. Kaiser's business represents 5.4% of O&M's overall revenue and 5.6% of its domestic revenue.
Still, O&M is affirming its financial outlook for 2016 of adjusted earnings per share of $2 to $2.05. The company said it would provide more detail on the loss of business when it releases its earnings on May 3.
"Although we are disappointed in the customer's decision to make this transition, we remain focused on achieving our long-term financial and operational performance goals," said CEO P. Cody Phipps, in a statement.
Kaiser is expanding northward by acquiring Seattle-based Group Health Cooperative. It's the first deal under CEO Bernard Tyson to put Kaiser in a new market, though it already operates in seven states beyond its California stronghold, as well as the District of Columbia.
Kaiser initiated its relationship with Owens & Minor in 2001 through a multiyear agreement with Broadlane, a group purchasing organization it had recently joined, according to a news release. Broadlane was later acquired by MedAssets in 2010, and MedAssets was acquired last year by the Irving, Texas-based company now known as Vizient.
A small but growing number of health systems have reduced their distributor relationships and shifted to a self-distribution model, cutting costs by receiving bulk shipments of supplies and distributing them to facilities from their own centralized warehouses. Livonia, Mich.-based Trinity Health is one of the largest systems to make the shift in recent years, as it announced in March that it would build a network of distribution centers and receive supplies direct from manufacturers.
