Med-surg distributors quietly do their part in supply chain

Healthcare Purchasing News, Sept, 2003 by Curt Werner

Hunkering down and making it through a distracting, if not tumultuous decade in the 1990s, the three remaining national medical-surgical supply distributors appear to have shaken off the turmoil and settled down to doing what they do best, namely making sure that the nation's 5,600 hospitals are supplied with the life-saving products they need in time to save those lives, and doing it for a reasonable price.

After a period when the urge to merge swept through, transformed and consolidated the industry, the past few years have brought no new major mergers. Nor have distributors been forced to revisit the embarrassment of the days when a combination of overzealous bidding on group purchasing contracts and a tough economy led to a humiliating plea to those same GPOs to lift margin points on contracts distributors had willfully signed just months earlier.

According to the current numbers at least, each distributor has been quietly and efficiently going about its business. Like good umpires, a good med-surg distributor is rarely noticed (other than perhaps by its shareholders). For the most part, no news is good news for distributors and hospitals alike. "This segment has experienced a very glacial rate of change," says Chris McFadden, a senior analyst who has long been covering the distribution sector for Goldman Sachs in New York.

During this current lengthy downturn in the general economy, distributors have faced the same economic pressures as hospitals, obliging them to do more with less mad find innovative solutions to perplexing problems. Most notably, hospitals are asking their med-surg supply distribution partners for help in tightening the supply chain, an area seen as the key to cutting second-dollar supply costs.

Perhaps as a testament to the soundness of the consolidation strategy that left the industry with only those three true national distribution choices (in addition to a number of worthy regional and local distribution outfits scattered across the country), and partially because of determined negotiations by GPOs, no single distributor has stood out as a low-cost or low-margin supplier. This development is in sharp contrast to the situation of less than a decade ago when distributors competed overtly on prices devised through complex account grids. Today, those grids musty remain, but the real advantages mad selling points are found in areas such as technological superiority and quality service. Hospitals are more willing to pay for these services. "No one distributor has taken a price leadership position," says McFadden. "And distributors are doing a great job of integrating themselves into their hospital customers' operations."

McFadden points out that becoming technologically and logistically entwined with their customers makes it mere difficult for a hospital to change distributors and more prone to try and work out issues and team up to solve problems as or even before they occur. "Exit costs are significant," he says. That development makes it each distributor's business to lose, so to speak, which in turn stabilizes market share. According to McFadden, the current market share lines up with Owens & Minor Inc., Richmond, VA, and Cardinal Health, McGaw Park, IL (the former Allegiance entry), "very close" in the mid-30 percent range of share, followed by Richmond-based McKesson Medical-Surgical in the low double-digits, leaving about 15 percent up for grabs. McFadden gives Owens & Minor, the duly "pure play" national med-surg distributor in existence, particularly high marks for its strong performance, both in financial numbers and in terms of efficient work.

He says that Owens has gained a reputation for loyalty to its customers and has managed to boost its sales above expectations on the strength of contracts like the five-year deal signed in June with Nashville-based HealthTrust Purchasing Group, a 900 member GPO, while maintaining a healthy 10.5 percent gross margin. "Owens has also continued to add new non-distribution services that are getting traction in the market," says McFadden. One of those is an Owens' consulting arm known as OMSolutions, a supply chain management consulting and implementation service launched last November.

After a period of cynicism and low-grade conflict, this is a time of detente between hospitals and their distributors on the med-surg side. After years of trying, distributors seem to have finally convinced hospitals that fire job they do is by and large an effective one that doesn't cost ton much money after all. Staying unconvinced are the few hospitals and integrated delivery networks that operate self-distribution systems within their networks. Florida's LeeSar Cooperative Services, which supplies Sarasota Memorial and Lee Memorial Hospital in nearby Fort Myers, FL, is one such exception, although LeeSar is also a GPO of sorts and earns revenue from a contracting service aside from functioning in a self distribution mode.

Noise has been made about self-distribution in the past, and observers like McFadden generally discount the commotion. "It's not clear to me that the mood for sell-distribution has changed dramatically," he told HPN.