Physician office distribution is a different world than acute-care distribution, according to suppliers
If your hospital or IDN is acquiring physician practices, as many are today, chances are you’ve been asked to explore opportunities for supply-chain-related savings. Your attention turns to distribution, and you ask yourself, “Why do those physician distributors command such high margins?” and “Are those physician-office sales reps really all that necessary?”
If you haven’t asked yourself these questions, you probably will. As many as 40 percent of primary care doctors who see patients in hospitals are now employed by hospitals, according to The Advisory Board Company. That’s about double the percentage in the year 2000.
According to the non-hospital distributors with whom the Journal of Healthcare Contracting spoke, physician distributors have traditionally been – and will continue to be – key players in helping physician practices operate successfully. A good distributor can help the practice implement electronic medical records, keep inventory under control, and comply with OSHA and CDC regulations, they say. In short, the services the non-hospital distributor brings to their customers differ markedly from those provided by acute-care distributors.
It’s no surprise that physician offices may feel some loyalty to their physician distributors, say distributors. But, they add, the physician office distributor and its reps aren’t a barrier to materials managers who wish to integrate newly acquired physician practices into their supply chain. In fact, non-hospital distributors can help the IDN materials management team implement supply-chain-related improvements, such as product standardization.
Different cost to serve
“It is not uncommon for some material managers to assume that extending their current hospital distribution model to their network of physician offices is a natural extension of services that will increase scale and lower cost,” says E.V. Clarke, vice president, chief marketing and operations officer, Henry Schein Medical. “They quickly learn that the hospital and physician office model of distribution are very different, with unique products, different requirements and a completely different cost-to-serve model for both the distributor and the provider.”
The scope of products in the physician office is different from that of hospitals, he says. In the hospital market, 90 percent of distributed products are med/surg products. The physician office, on the other hand, depends on their distributor for a much broader range of products, including medical/surgical, injectables, pharmaceuticals, equipment, and a portfolio of lab products specific to the office setting. “These products have unique regulatory and handling requirements, including cold chain, and in the case of equipment setup, that may not be part of their hospital
distribution relationship.”
Med/surg products are commonly less than 40 percent of the spend in the physician office, adds Clarke. Even within the med/surg products category, a hospital with a mix of specialty physician practices will find that only 30 percent to 35 percent of the SKUs used in the hospital cross into their physician practices. “That means that 65 percent of the products used in this setting are new products, which need to be set up often without contracts, including thousands of low-volume SKUs. This dynamic can make it difficult for a distributor or provider who is not architected to support this type of distribution, increasing expenses and potentially compromising service.”
In the hospital environment, the typical mode of transportation is LTL, regardless of whether product is broken into low-unit-of-measure totes or palletized bulk, adds Brad Connett, vice president and general manager, sales, Henry Schein Medical. A hospital doing $3 million in bulk delivery annually would typically have less than 150 shipments a year. However, delivery of the same dollar volume to a group of physician offices, whose average order may be $150, would equate to roughly 20,000 deliveries to hundreds of physicians, often in geographically disparate areas. The most economical and efficient model for distribution to such sites requires high-volume SKU centers, efficiently picked and packed, delivered by small parcel carrier, he says. “There is a completely different cost structure to serve the hospital vs. their office settings.”
Hospital materials managers may be surprised at the depth of relationship and the scope of services that a physician distributor provides to the office setting, adds Connett. The hospital has resources to handle issues that come up within the supply chain, he points out. But in the physician office, the person with ordering responsibility usually has other responsibilities. “The ordering and management of inventory is typically not sophisticated, and often there is turnover. As such, the physician office depends on their distributor to handle a broader scope of the day-to-day issues, so they can focus on the clinical needs of their patients.”
The physician office typically depends on their distributor for office and equipment setup or practice management solutions, which allow the physician to optimize their practice, he says. “It is not uncommon for the hospital to see this support as additional cost, only to find out that once the support model is pulled out or reduced, the burden of the issues fall back to Materials Management, which may not have the resources.”
Growing pains
“Over years of service, the services and solutions the distributor representative has provided have helped [physicians] build better practices,” says Greg Cressman, vice president, health systems, PSS. Those programs include low-unit-of-measure, stat delivery of products, inventory control programs, product training, etc. As such, the non-hospital distributor can be of great help to the hospital materials manager.
“Good non-acute distribution can help alleviate the stresses and headaches associated with the growing pains of acquiring physician practices,” says Cressman. Distributors can work with materials management and physician offices to standardize products and services, and they can probably do it faster than the hospital materials team working on its own.
“We talk a lot about clinical integration of products,” continues Cressman. “You want to be able to put a product in somebody’s hand that they can see, feel and touch, before you mandate it, in order for it to be used.” The physician sales rep, who is in the office regularly and has credibility with those in the practice, can do that. “PSS has the expertise and manufacturer relationships to accomplish clinical integration and standardization, along with training for services such as rapid testing.”
Solutions provider
Cardinal Health views the physician-office sales rep’s role as being a solutions-provider to the practice, says John Rademacher, president, ambulatory care. Sales reps help physicians, nurses and office managers evaluate product options and select the one that works best in the practice, he says. “They help [the practice] understand what options are available to them, and they show them what’s coming down the pike from different manufacturers.”
Because of their supply chain expertise, physician-office reps can advocate on behalf of the materials management organization whose IDN may have acquired the physician practice, says Rademacher. Reps can help the physician office staff understand nuances of supply chain concepts such as standardization, he says. But successful materials executives move slowly with their newly acquired practices. “There is an opportunity to bring some rationalization and standardization into the process, but that has to evolve over time in order to keep employee engagement and physician satisfaction high, and to make certain that the integration of these practices into the delivery network is optimal.
“You need to embrace the practices and try to leverage their strengths,” he says. “You need to optimize their ability to maximize patient care. You have to pick how you want to prioritize the assimilation and integration.” Physician-office distributors can help.