Vendors look for answers

Thursday, May 31, 2007

YARMOUTH, Maine - While the impact of competitive bidding on HME providers is relatively clear (i.e. fewer suppliers, lower reimbursement, more built-in costs), the consequences for manufacturers are relatively obscure. Will fewer suppliers force manufacturer consolidation? Will vendor margins shrink? Are we likely to see more manufacturers declaring bankruptcy? Will the constellation of HME manufacturers look vastly different in five years?
No one has ready answers to these questions. But dialogues with a handful of manufacturers reveal some commonalities, and some interesting divergences of opinion. One thing is clear. Product formularies and one-stop shopping are more important than ever. Invacare has rolled out a new product formulary at Medtrade Spring, called Invacare Xpress. And from Graham-Field to Drive Medical, the expectation is the same: Fewer suppliers will buy more from a single vendor.
"HMEs that pursue and win a competitive bid will be forced to consolidate their purchases because the name of the game for them will be efficiency," said Doug Francis, executive vice president at Drive. "Many of these companies will look for vendors that can or will assist with vendor-managed inventory and creative ways to cut costs."
At the same time, manufacturers are all but unanimous in the belief that their margins are already bottomed out. Invacare's senior vice president of worldwide marketing, Lou Slangen, said manufacturing margins for HME (except for the sleep business) are running, on average, at about 27%. That leaves little wiggle room for deeper cuts.
"Providers have driven down manufacturer pricing as far as it can go without sacrificing quality," he said. "And they need to offer consumers quality products, because they'll be responsible for those products for five years."
At Medline, it's the same deal: manufacturers are not likely to help suppliers through competitive bidding with further reductions. Even companies heavily vested in low-cost countries like China can barely cope.
"Labor rates in Asia keep rising, the Chinese currency continues to decline versus the dollar, aluminum remains at an all time high and now nickel (the primary metal in chrome plating) is 300% higher than it was a year ago," said Dave Jacobs, vice president off Medline's HME business.
With nowhere to go, and low margins, it's no wonder the manufacturer landscape looks the way it does. Big companies, like J&J, simply don't like margins this meager, according to Slangen.
Manufacturers do agree that something's got to give; there's got to be some place for manufacturers to go to build business. At companies like Medline and Graham-Field, weaning themselves off Medicare-oriented product is one destination.
"The companies that survive will do so because they understand that Medicare reimbursement, albeit the largest payer at this point, is just one source of revenue," said Larry de la Haba, vice president of key accounts at Graham-Field. "Vendors that develop innovative products, new markets and new ways to reach the end-users of their products will be able to assist HME providers to expand their business."
At Medline, this means revamped merchandising solutions, with spiffy signage and new retail items. At Drive, there's faith in innovative design and the emergence of more out-of-pocket consumers.
"There are some great designs out there that traditionally have not been great sellers because everyone has their Medicare blinders on," said Francis. "Once you take these blinders off, there are some great opportunities and the landscape isn't nearly as bleak."
But a distinction must be made between innovative design and out-of-pocket consumerism and what's likely to happen to equipment provided to Medicare beneficiaries.
Innovative design and splashy packaging are not likely to show up on the beneficiary's doorstep; rather, he'll be getting products that "will meet the minimal requirements of the HCPCS code, " said Rita Hostak, vice president of government relations at Sunrise Medical.
All manufacturers assure that the products they sell to suppliers for beneficiaries will be "high quality," but the bells and whistles are likely to be muffled.
"Something will have to give and ultimately it may be product features that provide improved functionally or clinical benefits to the beneficiary," said Hostak.
But if these specialty products are on the way out, at least for Medicare beneficiaries, are manufacturers going to feel a fatal squeeze as well? Slangen foresees bankruptcies for some manufacturers. Hostak believes "manufacturers who have been focused on specialized niche markets may be most at risk."
They're at risk of going out of business, not being scooped up, say manufacturers. There simply isn't the cash flow among manufacturers to make this a viable option today. Meanwhile, everyone waits on the consumer. These lifestyle/healthcare products have been built. But will these customers come?
"There is a vast base of consumers that don't even know our products exist," said de la Haba. "Because we have all grown up with Medicare as the primary payer and that is now changing, we need to change our strategies."