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Health care reform could speed consolidation – health care industry

Health care reform could speed consolidation – health care industry – Industry Overview

Susan Schooleman

Health care industry manufacturers are preparing for radical changes in the way they do business. Their buzzwords are becoming “cheaper” and “value-added.”

Vendors are anticipating having to sell to an entirely new type of customer, brought about by greater hospital regionalization and more hospital collaboration and shared services.

Moreover, suppliers expect to change the ways they use and compensate sales reps and are steeling themselves for major cutbacks in their sales forces. Straight commissions and reduced commission structures for reps are likely to become the rule of the day. Closer partnerships with distributors are probably in the cards, as well.

Medical device manufacturers and distributors have adopted a wait-and-see but try-not-to-worry position regarding health care reform that could shrink sales forces and forge partnerships between distributors and manufacturers.

Speculation about the pending reforms dominated discussions at the third annual Health Care Executive Forum held recently in Scottsdale, Ariz., sponsored by National Contracts, Inc., Irvine, Calif. Industry anxiety was underscored by the attendance–183 health care executives participated, up 25% over last year. Most wanted to schedule another forum in nine months to continue making the crucial connections needed to cope with reforms.

Outlook in general was bleak regarding the eventual shape of the Clinton administration’s health care policy. Some suppliers believe it could mean Medicare for all. Manufacturers also anticipate having to serve a different type of customer, either in the form of groups of hospitals that share resources or third-party payers. A health care system styled after that in Germany in which hospitals and private practice physicians operate exclusively of each other also could be in the works, according to one Washington, D.C. insider.

Manufacturers have so far avoided cutting staffs in anticipation of pending reforms, according to vendors questioned by Health Industry Today at the meeting. Company officials added that they have delayed developing their strategic plans because changes are so uncertain.

“National health care is as big as an elephant and as difficult to get hold of as a cloud,” said Teri Louden, president of Louden & Co., Chicago, Ill., health care marketing consultants.

Companies’ earnings and capital expenditures are flat this year, compared with previous years in which sales and profits grew rapidly, most executives told HIT. The stock market is demonstrating this same jittery feeling as investors continue to sell off many health care stocks because the industry no longer is considered a secure investment.

Health care reform is almost universally expected to be dramatic and its implementation swift, HIT’s interviews revealed. A bill should come before Congress in September regarding federal health policy, said Robert Betz, president and chief executive officer of Robert Betz Assoc. Inc., a Washington, D.C.-based national consulting firm specializing in information and government relations services. But the contents are unknown. “Anyone who stands before you and says they know about health care reform, does not,” said Betz, a former associate director of legislative affairs for the American Hospital Assn.

Managed care initiatives will result in hospitals being pooled into regional groups, Betz theorized. Health insurance would be provided through cooperatives that employers pay to join. Germany’s health care system is expected to become the blueprint for Clinton, he believes. The German government maintains a single fund to cover all health care. Physicians in Germany either are on staff at a hospital or maintain a private practice.

Hospitals could end up sharing resources such as costly capital equipment and perhaps even facilities and combining operations as their resources are limited by the government.

These regional groups of hospitals that share services and combine operations would intensify the pace of already rapid consolidation in the health care industry, possibly forcing manufacturers to join with distributors in an effort to offer cost-saving deals to groups, Betz predicted.

But before partnerships between manufacturers and distributors occur, pricing disputes must be worked out. Distributor mark-ups often sabotage a manufacturer’s aggressive pricing strategy, many executives concur.

“It does us no good as group purchasing organizations and hospitals to receive a good manufacturer’s price, then get beat up on the distributor’s cost,” lamented Jonah Hughes, vice president of purchasing for Daughters of Charity National Health System, St. Louis, Mo. In general, a distributor adds about 7% to the cost of supplies, while stockless distribution charges can add at least twice that amount.

Cost-containment efforts by manufacturers could lead to cutbacks in the use of sales reps, who would be replaced by distributors as part of the move toward closer relationships between vendors and distributors. If distributors take on more of the sales rep’s responsibilities, the current commission structure and sales force size could change radically, predicted Lance Piccolo, chairman and CEO of Caremark International Inc., Northbrook, Ill.

Major companies such as DePuy Inc., Warsaw, Ind., and Zimmer Inc., also in Warsaw, Ind., already pay no base salary to reps. But straight commissions for reps are expected to become more the rule industry-wide in the face of health care reform. Commission structures may be reduced and the size of sales forces could be slashed.

“The fundamental problem we have is with how we compensate sales reps. They do play a very important role, but that role is going to have to change,” said Steve Nielsen, president and CEO of General Medical Corp., Richmond, Va.

Reforms are expected to affect product development by shifting the industry’s focus from technology to cost containment. “If a product doesn’t increase productivity or lower costs, it won’t make it in the ’90s,” said Jeff Langan, general manager of Hewlett-Packard Co., Palo Alto, Calif.

Hospital CEOs and purchasing groups, rather than physicians, are making final purchase decisions, representing a fundamental change in the way capital equipment is purchased. Orthopedic surgeons are the last group to become cost-conscious, according to hospital administrators.

Many surgeons continue to urge hospitals to purchase expensive advanced technology that may not be cost-effective in today’s or tomorrow’s environment.

Cost containment already is a major issue in selling to hospitals, according to industry executives. Today’s sales pitch stresses cheaper units and value-added services. For example, Ethicon Endo-Surgery, Cincinnati, Ohio, emphasizes its surgeon training center.

The facility was built after Ethicon noticed the poor training surgeons received when laparoscopic instruments first hit the market. Much of that training occurred during a weekend stay at a hotel, said William Weldon, president of Ethicon Endo-Surgery. The center now is used to instruct surgeons on how to properly use Ethicon instruments.

Stuart Medical Inc., Greensburg, Pa., also focuses on specialized service. The company used a computer tracking system to discover that only 26% of supplies for multi-hospital system Yankee Alliance, Andover, Mass., were purchased through materials managers. The rest were ordered through individual departments with a whopping 41% ordered by operating room facilities.

Stuart’s also convinced Yankee Alliance materials managers to provide monthly stock status reports to central administration. Materials managers had refused to share the reports containing all items ordered and their purchase price. “It was like pulling teeth,” Yankee Alliance president Paul O’Neill recalled.

Administrators from both Stuart’s and Yankee visited all 14 acute care hospitals–in person–and explained the need for the report. The personal touch is what convinced materials managers to share their reports.

The alliance used the reports to cut costs. For example, one hospital was paying $2.42 a pair for slippers that other hospitals purchased for 53 cents, O’Neill said. This could not have been detected without the monthly report.

Although anxiety is the prevalent emotion regarding reforms, some executives are optimistic about potential partnerships and the new multi-hospital system customers. “How is the customer going to define distribution? Will it be segmented by commodity or be an integrated, internal system?

“Is it going to be product-oriented or process-oriented? I think there is a tremendous opportunity for new people and new opportunities in the market,” said Richard Byington, executive vice president and general manager of Stuart’s.

COPYRIGHT 1993 J.B. Lippincott Company

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