Private labeling on the upswing

Healthcare Purchasing News, Feb, 2004 by John Andrews

At what point does buying a name brand become less important than getting the best quality for the lowest price?

Sensibilities regarding that question probably differ widely, but if Novation's membership is an accurate reflection of the industry at large, it is being considered by purchasing decision makers with increasing regularity. The Irving, TX-based purchasing arm for VHA and UHC estimates that $1.5 billion will be spent aggregately on private label goods in 2003--a 50% climb since 1998.

Novation's NovaPlus private label program, which started in 1985 as VHA Plus, now represents about 7% of its total supply portfolio. Approximately 1,370 products carry the NovaPlus label, including wet pack products, blood pressure cuffs, dialysis kits, patient cleansing products, exam gloves, ventilators, operating room sponges and towels, blood gas kits, electrodes and patient footwear. Private label products are available for anesthesia, diagnostic imaging, orthopedics, respiratory, surgical, and general medical categories.

"In the face of lower reimbursement for government programs, a slow economy and almost 44 million Americans without health insurance, the nation's hospitals are struggling to make ends meet," said Jody Hatcher, Novation senior vice president. "The NovaPlus program ... helps their financial picture and also helps hold down the cost of healthcare." The fact that hospitals are under economic duress is nothing new, so there may not be a specific trigger for the upswing, other than private label products have matured and materials managers are increasingly realizing that there is real value in using them.

David Kaczmarek, vice president of the McFaul and Lyons Group, Horsham, PA, says he hasn't noticed an obvious migration toward private label purchasing, but added that it wouldn't surprise him, either.

"From a cost reduction standpoint, it makes sense because a private label is less costly than the big brands," he said. "It comes down to evaluating product quality."

Hatcher insists that all products under the NovaPlus label are scrutinized thoroughly at the manufacturing level before production is even considered.

"What we convey to our members is that the quality of our private label is as good or better than name brands," he said. "Before an agreement is reached, we conduct an audit of each manufacturer's processes. We conduct onsite visits and meet with their regulatory affairs people to ensure their adherence to good manufacturing processes."

Currently Novation has 78 contracts with 50 manufacturers to make NovaPlus products--32 for pharmaceutical products and 46 for med/surg supplies. The GPO determines the products it wants and sends out requests for proposal to manufacturers for bids.

"Our members identify and determine the appropriate products and bids are sent out asking manufacturers whether it makes sense as a private label," Hatcher said. "If so, we evaluate the bids and our member council makes a recommendation."

Contracts can either be exclusive or preferred, de pending on the type of product. Gloves, for instance, require multisource production because the inconsistent flow of latex can restrict one manufacturer from providing the necessary volume, he said.

Private label pioneer

Mundelein, IL-based Medline Industries has been associated with private label products since its inception 37 years ago. Although the Medline label is technically a "name brand," the private label tag stems back to the beginning when the company searched for an identity, said President Andy Mills.

"When the company formed in 1966, my father and uncle had to decide whether to be a manufacturer or distributor," he said. "They were leery about being a pure distributor, but at that time margins were better for distributors because of cost-plus reimbursement. Yet they felt that the distributors were at the whim of the manufacturers and that if the 3Ms and J&Js limited the number of their distributors, their business would be at risk. So they decided to control their own destiny."

Although the company started the practice of what has become known as private labeling right out of the gate, Mills said the term needs some clarification with regards to Medline's operation.

"Private label takes on a broader definition in terms of what we do," he said. "We've been lumped into a category that is referred to by stone in a derogatory manner. Although we have contracted to make products for other manufacturers, many of our brands originate with us and are patented. A number of these products happen to be market leaders."

Medline counts Novation and AmeriNet among its clientele as well as a growing list of mass merchandisers that are bolstering their inventories of over-the-counter medical products for the public. Despite the company's reputation for being a ubiquitous private label producer, Mills downplays that assertion.

"We're more vertically integrated than a pure private label manufacturer," he said.

Savings potential

Novation members purchasing through NovaPlus can expect to shave about 14% off their purchasing totals and that figure is nearly double the 8% savings provided just three years ago, Hatcher said.