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Consolidations Put the Squeezeon Small Manufacturers

Medical Device & Diagnostic Industry Magazine | MDDI Article Index

Originally published February, 1997

Small medical manufacturers are feeling squeezed by rampant industry consolidation and see dwindling prospects for success and survival--at least, that was the underlying theme at "Winning in the New Era of Health-Care Industry Consolidation," a seminar sponsored by the Health Industry Manufacturers Association (HIMA) last December. Throughout the conference, repeated references to Columbia/HCA (Nashville, TN) drew participants into two camps--the small manufacturers who view the giant as a symbol of a system gone awry, and the analysts who lionize it as a model for efficient and dynamic management.

Speakers such as Ray Larkin, president and CEO of Nellcor Puritan Bennett (Pleasanton, CA), for example, avowed that Columbia "is not trying to beat the daylights out of its suppliers." Columbia, he said, has acknowledged the importance of maintaining reasonable margins and knows that it's impossible to form an alliance with a company that's going out of business. Molly Coye of HealthDesk (Berkeley, CA) pointed to an increase in the efficiency and profitability of a hospital recently taken over by Columbia, noting that the organization's vast capital resources were pivotal in instituting necessary upgrades to equipment and information systems.

On the other hand, some manufacturers expressed concern about their access--or rather, lack of access--to the big group purchasing organizations (GPOs). Francis Lavin, president and CEO of MicroAire Surgical Instruments (Valencia, CA), seemed to strike a chord when he stood up from the audience and explained, "We've been lowering our prices for the past three years. Our problem isn't that we're not willing to help, it's that we're not even being asked to sit down at the bidding table."

To judge from the tenor of the conference, it's evident that the GPOs, growing in size but decreasing in number, simply don't have time to talk to smaller suppliers. From their perspective, it's far more efficient to stay on top of a few huge deals than to manage a vast number of smaller contracts. And suppose a small manufacturer does win a contract from Premier Health Alliance (Westchester, IL) or a similar group--will that manufacturer have the facilities in place to handle an overnight jump to a 20% market share?

How are manufacturers expected to plan strategically in an industry that has seen, according to Connie Woodburn of Premier, one out of five community hospitals change hands in the last two years? Nellcor's Larkin suggested that in the long run, companies that don't have a differentiating technology or product and want to grow will have to have their products taken up as part of a larger company's line, simply because larger companies "are perceived as better partners." Suppliers need to reach a "critical mass" just to get noticed by the big purchasing groups, and decisions in the coming months might well determine whether a company finds itself on the buying or selling end of an industry deal.

Still, one participant recounted his success in assembling a group of small suppliers to target the gaps in the large purchasing contracts, focusing on those commodity items that are too inexpensive to receive coverage as part of a large plan. At that point, he said, "you switch from being a sales rep to being a resource provider."

More than one panel stressed the importance of being a resource provider rather than a mere product supplier. According to Bill Cleverley at the Center for Healthcare Industry Performance (Columbus, OH), "there is tremendous opportunity for cost reduction in the hospital industry" and those manufacturers who can help develop strategies and protocols to increase efficiency will gain a marketing edge.

Some hospitals, for example, are using the equivalent of statistical quality control to help physicians isolate their own best practices. Armed with quantified data about which products work best at each hospital, administrators will revamp their purchasing strategies and specify only those devices with a proven track record. Suppliers can curry favor by isolating which procedures truly benefit from a particular product and which applications are superfluous.

Naturally, some manufacturers will have a hard time swallowing this idea of "utilization reduction," which essentially boils down to teaching hospitals how not to use their products. Raising more than a few eyebrows, Brenda Clayton of Tenet Healthcare (Santa Monica, CA) suggested that suppliers might make concessions to permit more resterilization of disposable devices, intimating that the practice is already widespread. "Hospitals," she said, "would far rather work with the original manufacturer in this case than with a freelancer."

Part of being a resource provider entails developing the quantifiable data to support product claims. Gary Bang, president and CEO of Target Therapeutics (Fremont, CA), described an extensive campaign involving outside consultants to generate end-cost information simultaneously with clinical outcomes data. Hospital administrators, he said, look very carefully at return-on-investment information. Mike James explained how Medtronic (Minneapolis) assembled data showing that their pacing devices, when placed in elderly patients, could prevent broken bones caused by falls during cardiac episodes.

On the other hand, Bill Mavity, president and CEO of InnerDyne Medical (Sunnyvale, CA), described the extensive cost-savings analyses that his company performed. Even though the results were "quite positive," he said, "we still had trouble getting into the supply chain."

It's clear that sales can't be negotiated in the traditional manner and that physicians are relinquishing decision-making power. Manufacturers can only throw up their hands when an orthopedic surgeon flatly says, "If you've got a great orthopedic product, don't come to me with it because I can't do anything about it." As William Mohlenbrock, MD, of Iameter (La Jolla, CA), declared, "You're going to have to get out of the business of sending someone into my waiting room."

Ruth-Ellen Abdulmassih of Abbott Diagnostics (Santa Clara, CA) demonstrated the difficulty of identifying the appropriate management level for formulating deals, and predicted that in the future there will be less need for salespeople in targeted accounts and more need for technical assistance. Joe Mulroy of Amerinet (St. Louis) favors a sales strategy that begins with educational seminars for hospital executives and then works with individuals on the lower tiers. Manufacturers can help, he said, by being part of the group that works to overcome resistance down the ladder.

Manufacturers should also bear in mind that integrated information systems relay purchasing decisions to representatives across the country. As Clayton said, manufacturers will not get away with quoting one price for a hospital in South Carolina and another for California.

Several speakers and audience members offered hope that future sales pitches will be made on the consumer level as health-care delivery aspires to the same high status as Nike sneakers. The baby boomers, if adequately informed, can bring tremendous market pressure to bear on the purchasing decisions of health-care delivery centers. As one audience member suggested, "If the baby boomers think that innovation will stop just when they need it, you can bet there will be a new interest in innovation." The Internet, for example, is becoming far more accessible and user-friendly, and manufacturers might use this technology to sway consumers directly.

Most of the small manufacturers represented at the conference feel more threatened by industry consolidation than by FDA crackdowns. "Managed care" in reality has come to mean "managed cost," and margins are reportedly shrinking all over. In the view of these manufacturers, the health-care industry has always relied on the technical innovations generated by small suppliers, and without such innovation the industry will certainly crumble.

But the picture is not necessarily bleak. Dominated by a philosophy of disease management, the health-care industry is already beginning to emphasize diagnostics over therapeutics. Linda Sonntag of Axiom Venture Advisors (San Francisco) predicted that the human genome project will revolutionize health care in the next 10 years. "Population-based managed care won't work," she declared, because it requires large expenditures for diagnosis and treatment of existing disease.

But in the future, she said, physicians will diagnose predispositions rather than conditions. By enabling physicians to deal with an individual's condition at an early stage, the genome project will bring patients back to health care's center stage. That doesn't mean that physician care will again function as a cottage industry, but a return to more personalized health care will present greater opportunities for manufacturers of all sizes.--Gabe Spera

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