Significant change can mean new advantages for distributors
By Ted Almon
Ted Almon
Do independent distributors stand a chance in an age of provider and supplier consolidation? Yes. But they have to bring something different – products and services – to the table than their giant competitors. Doing so will require new perspectives and new skills.
It’s no secret that our healthcare system is changing, said Claflin Company President Ted Almon at this summer’s Distributor Insights conference in Atlanta, Ga., sponsored by MDSI, publisher of Repertoire.
For a variety of reasons – most notably, the way providers have been paid – healthcare is often delivered in silos – e.g., the acute-care hospital, the physician’s office, the nursing home, the home care agency, etc. Distributors have evolved accordingly, and have succeeded by focusing on just one or two of those silos. Hence, you have acute care distributors, physician distributors, etc.
But that model is in jeopardy, said Almon. That’s because providers are moving away from the silo approach, and attempting to coordinate care across different sites. Part of the transition is due to regulation. The federal government, recognizing that a few healthcare organizations were able to provide high-quality, low-cost healthcare by reorganizing themselves, have incentivized more to form accountable care organizations, or ACOs.
Coordinated care – such as that offered by ACOs – usually translates to better transitions of care among providers, better patient outcomes and a better patient experience. “This model is where we think the industry is going, and it will have implications for all of us,” said Almon.
This is true regardless of the ultimate fate of the Affordable Care Act, he believes. Silo-based care is expensive, and the escalation of healthcare costs seen in the recent past is unsustainable. “It is a drag on economic growth, and it is a competitive disadvantage to U.S. companies that compete in the global marketplace,” he said.
Coordinated care, or ACOs, do not signal a return to the managed care of the 1990s, he continued. “Managed care didn’t work well because we only had one metric to measure – cost. So, managed care was really managed cost.” Crank down on cost, you crank down on quality of care. “And in some cases, that is what happened.”
In contrast, today, information technology allows administrators to measure quality of care and patient outcomes, not just cost. “Today’s IT capabilities allow us to offer creative incentives within the payment system based on the quality of patient experience and outcomes. We can build a system based on quality, not just cost, which hopefully will be more efficient too.”
Supply chain implications
What difference does this make to those in the supply chain? Almon’s own company – Warwick, R.I.-based Claflin – serves as an example.
Traditionally a hospital supply dealer, Claflin several years ago recognized that healthcare was shifting away from the inpatient hospital to more outpatient settings. “We needed to be more adaptable to send orders to points of use that were much more diverse than before,” he said. Consequently, Claflin now has roughly half a mile of low-unit-of-measure picking locations to accommodate those different settings.
Hospital-centric ACOs are changing the rules, and distributors have to adjust, he continued. Administrators of hospital systems that have acquired or built outpatient facilities typically want to capture the point-of-care business in those facilities, such as lab and X-ray. “If you’re a physician dealer and your revenue stream has relied on ambulatory point-of-care testing, you might experience change you have to think strategically about,” said Almon.
But there’s good news too, he said. “Any time you have this significant a change, there are always advantages for smaller companies as opposed to larger ones, which take longer to make decisions.” Two surefire rules of thumb: Sell something that people need, but that they can’t get anywhere else; and be the low-cost producer or provider of your product or service.
The fact is, supply chain executives in hospital-centric ACOs need help, and a willing distributor can lend it to them. “Supply managers in hospitals are used to dealing with a supply chain that is ‘intramural,’ that is, within their own walls,” said Almon. “But when they become part of an accountable care organization, they become responsible for distribution and procurement for a diverse group of providers.”
One Boston teaching hospital faced such a situation. The hospital – not one of Claflin’s customers – was transitioning into an accountable care organization, and set up several surgery centers in the suburbs. Claflin’s equipment company was involved in the setups. But just before the centers opened, the supply chain executive told the Claflin team that he was having trouble staffing supply chain teams in the facilities. The hospital didn’t really know how to do it, and so asked if Claflin would consider a temporary or interim contract to run the supply chain for the hospital while the centers got up and running.
Claflin did so, and, when the interim contract expired, the hospital awarded the distributor a permanent contract to provide staffing for the surgery centers. It was a profitable arrangement for Claflin, and it changed Claflin’s relationship with the provider such that when the distribution contract with the system’s prime vendor was up, the hospital encouraged Claflin to bid for the business. The result was an $8 million to $10 million distribution contract. “And it all resulted from our willingness to do something a little innovative, outside our comfort zone, which we thought we could do.”
Even hospital systems that set up consolidated service centers – encompassing med/surg distribution, sterile processing, laundry, and even pharmacy and cook/chill food operations, – can use the distributor’s help. “Any such center will need to be staffed,” said Almon. “If they are going to be doing logistics and distribution, why not outsource the management to an expert, like a distributor?”
Cause for optimism
Healthcare is still local, said Almon. Local distributors have an advantage in establishing strong bonds with their communities by participating in events, such as fund-raisers. And whenever big companies merge, there’s always fallout, on which small companies can capitalize.
And consolidation happens. Look at the hardware and office supplies industries. Yet even within those industries, independents continue to flourish, by banding together through such entities as Ace Hardware and United Stationers. Take advantage of the services your co-op (Claflin is an NDC member) offers, Almon advised independents.
“There is a sea change going on in the healthcare delivery system, and therefore the industry. In such a circumstance, when the ground is shaking, being at the tip of the pyramid is not the best place to be. But [independent distributors] can move nimbly into the vacuums of service that are created.
I believe…that the smaller, more nimble enterprises have an advantage in times like these.”
Distributors’ tools for success
What tools do distributors need to be successful? Ted Almon, president, Claflin Company, listed three of the most important.
- Business intelligence systems to help ACOs track their supply spend. “There are now a number of ‘business intelligence’ or ‘dashboard’ applications available for commercial purchase and bolt-on, or even in the cloud as software-as-a-service,” he said. “HIDA offers one to their members on a subscription basis. You can offer these programs to your customers to track their spend across their entire ACO with an incredible amount of drill-down data available to them to analyze the usage of every cost center. It will track things like contract and/or GPO compliance, usage variations, etc., all in graphic format. All the national distributors have them, so this is just a way for independents to keep up.”
- A diversified delivery system. “The delivery requirements for accountable care organizations are different than those for hospitals. Claflin used to rely on 53-ft 18-wheelers to service its hospital customers, but has diversified its fleet and the way it delivers packages.
- A trained workforce that understands logistics on both ends of the chain – that is, the distributor’s warehouse and the providers’ warehouse or central supply. Claflin sent some its workers to a customer location for a couple of days to help them understand what happens to orders after they leave the distributor. “By doing this, we gained a much better understanding of our customers’ needs, and we have been able to develop products to make the experience more positive and, frankly, to make it more difficult for them to replace us with other vendors.”