No Need to Panic

Edition: November 2008 - Vol 16 Number 11
Article#: 3063
Author: Repertoire

Editor's Note: In September, Repertoire examined some of the forces driving hospitals and health systems to acquire physician practices, and those driving physicians to seek employment. Last month, we examined why the marriage might work better than it did 15 years ago, during the last wave of hospital acquisitions of physician practices. In the final installment of the series, we look at strategies physician distributors are employing to respond to and succeed in the face of this trend.

Hospitals and IDNs may be buying physician practices at a rate that the industry hasn't seen for 10 or 15 years. But physician distributors aren't panicking. Not yet anyway. Why not?

First of all, they believe they can prevent some of these acquisitions from occurring in the first place, by offering business solutions that will keep their physician-office customers healthy, whole and independent.

Second, not all of them are convinced that hospitals and IDNs are buying physician practices in record numbers. In fact, in some areas of the country, the trend is barely a blip on the healthcare radar screen.

Third, those in areas that are seeing a high rate of buyouts aren't convinced the newly acquired practices will remain hospital-owned forever. After all, hospitals and doctors reversed themselves once before, about 10 years ago. Who's to say they won't do it again? In the meantime, distributors are staying close to their customers, even those who do get acquired.

And fourth, assuming the worst (that is, that a large chunk of their physician-office customers get bought out by acute-care facilities or systems), they believe they can continue to find opportunities in the business. If they have built strong ties to the physicians over the years, they just might retain a portion - or all - of the business. What's more, there's a chance they can pick up some business as a backup supplier to the acute-care facilities as well.

Although they might not be panicking, executives and owners of physician distributors are watching the trend and responding aggressively to the challenge and opportunities it is presenting.

Silver lining

In Southern California, hospital buyouts of physician practices are still relatively few and far between, notes Michael Simpson, owner, Kern Surgical Supply, Bakersfield, Calif. Yet some hospitals and IDNs there are acquiring specialists in an effort to create some vertical integration and to capture lucrative business. In some cases, the hospital-owners are relocating their newly acquired practices to buildings near the inpatient facilities. In those cases, the hospital most likely controls distribution of products to the specialists. "The hospital in effect is running its own distribution network, though not to the same level of sophistication as ours," says Simpson.

On the face of it, that's bad news. But there is a silver lining. "I think where the problem will occur - and where we still have a golden opportunity - is that hospitals don't provide the same level of service [to which physicians are accustomed]," says Simpson. In their search to cut costs, hospital materials executives tend to emphasize product standardization. But they can run into trouble if they try to shove one brand of gloves, for example, down physicians' throats. Physician distributors such as Kern are used to stocking and delivering a multitude of gloves, but the big hospital distributors - and their IDN customers - are not. "This is where things could break down," he says.

If a hospital or IDN does buy some physician practices, distributors should add the hospital's materials department onto its call-point list. By doing so, the distributor might position itself as a backup to the acute-care supplier. Even a small chunk of an IDN's business can be significant to a small distributor, he says.

Even more important, by maintaining a presence in the hospital's materials department and by playing the role of problem-solver, the physician-office supplier might land a big order for the hospital-owned physician practices. Kern landed a deal for multiple exam tables with just such an approach. "We got the table order because our rep had a relationship with the purchasing person," says Simpson.

Keep customers healthy

Helping customers stay healthy is the first and perhaps best approach to trends in today's market, says Eddie Dienes, senior vice president of sales for PSS. "In the big scheme of things, I think physicians want to remain independent. It's our job as distributors to try to provide clinical and business solutions to allow them to do that. And we need to be proactive about it. We can't wait until the doctor is ready to sell the practice. We have to be in there and say, 'We've got solutions to make your practice healthier.'"

Of course, some physicians will sell their practices nevertheless, says Dienes. But that doesn't mean the game is over. "We've lost some accounts, no question," he says. "But we definitely have a fighting chance to keep that business. It all starts with, 'What kind of relationship do we have, and what kind of service have we provided to that physician?'" Even in situations where the hospital wants to switch the newly acquired practice to the acute-care distributor, "if you have a physician who is willing to say, 'I don't want to lose what I get with PSS,' we have a much better chance of keeping the business."

Bob Holmes, vice president of sales for Lake Erie Medical Supply in Temperance, Mich., notes that hospitals in Northwest Ohio and Southeast Michigan are, indeed, acquiring physician practices. "In most cases, [hospitals or IDNs] try to centralize purchasing with the materials management department of the hospital," he says. "Others who have had a lot of complaints from their physicians and physician office staff member are willing to pay a little more for service from suppliers like ourselves. Currently this is the minority, sad to say."

Pricing issues

Indeed, physician-office distributors wishing to continue servicing their customers whose practices have been bought by acute-care facilities will have to confront some pricing issues. Proactive ones are dealing with the issue even before it arises.

"We don't see a tremendous amount of hospitals purchasing independent doctor practices as of yet, but we do anticipate it," says Jeff Schimbeno, senior vice president of sales and marketing for Bell Medical Services, Marlboro, N.J. "Currently, we are looking to establish improved relationships with manufacturers to ensure we can compete with pricing."

It's true that hospitals that acquire physician practices want to centralize product selection and purchasing, says Schimbeno. "The major allure is saving on expenses and [achieving] greater buying power, which can tie them into a GPO." That's why it's important for physician-office distributors to work with their manufacturers to bring down prices as much as possible. "[The physician distributor] can be more expensive, but not tremendously more," he says. "The key will be working with manufacturers to bridge the gap."

And it's up to the distributor to show manufacturers why they should help them bridge that gap, he continues. "I have to show them I provide growth for them by uncovering opportunities the larger distributors ignore," he says. "It all starts with the manufacturers realizing the value of the little guy and leveling the playing field." Much of that value lies in the service that the local distributor can provide its customers, he says. "Pricing gets the customer. Service keeps them."

A flip in store?

Meanwhile, in Louisville, Ky., it's tough to find a standalone doctor these days, says Ron Presley, vice president business operations for LABSCO. He notes that in some cases, multihospital-system owners of medical practices accept products from their hospital distributor, then redistribute them to the doctors. "The small dealer is lucky to get any business in this scenario," he says. "The only way to battle the problem is service, service and more service."

"IDNs think the dealers are adding cost to the supply chain and they can do it better," adds Presley. "We all know it's not the distributors getting rich. They will find out soon enough how unprofitable it is. That's when we will get the swing back the other way.

"Docs are all facing higher operating costs, and the promise of a steady paycheck looks good," he continues. "But they eventually get tired of being told how to practice medicine and they reopen another practice or buy back their old practice for less than the amount the hospital paid for it…thus starting the circle of life once again."

Presley isn't the only one who believes that the trend of hospitals and IDNs buying physician practices will reverse itself, as it did 10 years ago.

"One of the biggest challenges to physicians who are 'guided' to receive everything they use from the materials management department is this," says Holmes. "They are left behind as far as finding out about new diagnostic tests, procedures and/or equipment and supplies that could save them time or money or both. With the demands of a private practice, most physicians today do not have enough time to keep up with their patients, new drugs, government regs, etc.

"In every office we have gotten back, we have so much opportunity to update their equipment and educate them on new diagnostic procedures and in-office testing. It is almost as if once they are purchased by a hospital, they continue to practice the same way for the next five to 15 years, until their contracts run out and they can go out on their own again. Then when we come in the door with all of the 'new technology,' they are amazed at what is out there, not only for the convenience of the patient, but to help them diagnose the patient in a quicker time frame too."

Adds Dienes, "The last time [hospitals started acquiring physician practices] - 10 or 15 years ago - suddenly, it flipped. Who's to say that won't happen again? You can't not be diligent about making your position healthier. But who knows? Five years from now, two years from now, there could be a total flip-flop."

Practice Profile

CORRECTION: In Part 1 of this series, which was published in the September 2008 issue of Repertoire, we presented some data erroneously. Here is correct - and updated - information

Practice profile of family physicians (as of December 31, 2007)

Practice base

Office 89.3 percent

Hospital 6.7 percent

Other 4.0 percent

Practice owner

Self 24.7 percent

Medical group practice 26.4 percent

Hospital or health system 28.9 percent

Managed care organization or insurance company 3.3 percent

Federal, state or local government 9.9 percent

Other and unknown 6.8 percent

Practice arrangement

Solo 18.8 percent

Two-person partnership 8.2 percent

Family practice group 41.9 percent

Multispecialty group 21.7 percent

Other/unknown 9.4 percent

Source: American Academy of Family Physicians (31,894 respondents)