By Ted Almon, president and CEO of Claflin Co., Warwick, R.I.
It is a natural tendency for large buyers to look to eliminate middlemen in their purchasing. The concept is sometimes called disintermediation, and it can occur in any channel of business where customer consolidation creates very large buyers in relatively short periods of time. Our industry should keep this in mind as we consider the seeming trend by some hospital networks toward self-distribution.
If distributors feel threatened by the trend, perhaps we shouldn’t encourage it unwittingly in the way we price products and services. (Manufacturers and GPOs need to look at their policies as well.)
At first blush, it seems odd that any rational make-vs.-buy analysis of distribution services – which are available to many large hospitals and IDNs for low- to mid-single digit markups – would pose a savings opportunity for providers. Indeed it seems unlikely to most industry insiders that any but the very largest and most sophisticated provider entities could achieve anything approaching profitability in such a venture. Still, we hear on a remarkably regular basis of yet another group willing to take the risky and expensive plunge.
Not in a vacuum
This trend isn’t taking place in a vacuum; rather, it is part of a healthcare landscape that is chaotic with change. If there is a primary force behind this change, it may be the rush to form accountable care organizations, that is, entities organized across the silos of medicine capable of coordinating care for a population of patients, both inpatient and outpatient. The energy behind this movement seems to be a collective realization or belief that traditional fee-for-service reimbursement is the driver of escalating costs.
Former neatly separated markets for hospitals, physician/clinics, long-term care facilities and homecare agencies have become homogenized in the emerging ACOs. This presents challenges in nearly every element of distribution, but perhaps especially in contract pricing, a function where manufacturers, distributors and group purchasing organizations have traditionally maintained separate programs for each market segment.
The ACO is looking to save money for an array of now-allied healthcare provider entities, previously served by separate vendors and even channels. Their opening parry is predictable enough: They want to pay the hospital’s price for everyone they buy for. On the surface, why shouldn’t they?
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