How To ‘Beat The Bundle’ In Medical Supply Sales
BLOG SERIES
[Installment #2 of 3]
IN INSTALLMENT 1, we set out to demystify bundling by defining exactly what it is and how it’s used as a sales strategy. In Installment 2, we’ll address what matters most to each of the key stakeholders so you have a comprehensive understanding of everyone’s perspective and know precisely what you’re up against in your efforts to ‘beat the bundle’ and close that sale!
HOW TO ‘BEAT THE BUNDLE’ IN MEDICAL SUPPLY SALES
UNDERSTANDING STAKEHOLDERS’ PERSPECTIVES IS IMPERATIVE
By LOWELL CHURCH
Partner
[May 2, 2021] – Like any champion athlete, military strategist, even a psychologist, getting “in the mind” of the other guy is key to fully understanding what you’re contending with and finding a way to break through and emerge victorious. Same is true when it comes to medical supply sales and the formidable foe known as “bundling”.
As I wrote in Installment 1 of this 3-part blog series, “a bundled discount occurs when a seller conditions a discount or rebate on the buyer’s purchase of two or more different products from that seller. Bundled discounts come in many varieties.” Truth be known, there are infinite ways the seller can bundle products in an attempt to box out competition and replenish its financial pipeline.
I also wrote “to gain a comprehensive understanding of bundling, you must view it from a variety of perspectives -- Manufacturer, Distributor, Group Purchasing Organization [GPO], Provider and Payer [insurance, Medicare, Medicaid, private pay].” This is a lengthy read but I assure you it’s well worth 6-8 minutes of your time if you’re serious about “beating the bundle”.
Bundling from the Manufacturer’s perspective …
Obviously, all Manufacturers seek to fully capitalize on demand for their products – which comes from a current need state -- then maintain or grow that volume consistently over time. Having a reliable, steady demand for the products allows them to invest in infrastructure and maintain a high-quality labor force. Bundling is a key tactic used to accomplish these objectives.
It’s not uncommon for a company that manufactures a variety of products -- through either proprietary research and development [R&D] or acquisition -- to have certain products in its portfolio that have achieved a high level of desirability, brand recognition, and a resultant strong demand. It often takes years to promote a product, improving its features along the way and educating customers to product benefits. All this tills the soil for high demand which essentially shields the product from competition.
For example, a leading endomechanical supplier manufactures a suture product that has sustained itself nicely in a niche market for many years. Physicians train using the product which has evolved and improved over time meaning product performance and outcome are very reliable. Several companies have tried to compete with the Manufacturer over the years with little success. The company also manufactures and sells other products in the surgical space but those products don’t t have the same level of customer demand as their popular suture.
Getting back to bundling …
Now that this particular manufacturer has an “anchor” product – the widely embraced suture -- in its portfolio, they’re able to leverage its demand to sell other products. This is where they use the bundling concept to drive sales of their total portfolio.
For example, if you commit to using one or more of their other products, they extend an advantaged price on not only those products but also their highly popular suture. Note that the Provider is somewhat held hostage by the strong need/desire to use this particular suture as well as their need to reduce cost. This makes them willing to compromise by using the company’s other products they might not otherwise select based on quality and performance. Truth is, other Manufacturers have products that are superior to the suture company’s “other” products but are unable to sell to this customer due to the bundle necessary to purchase the in-demand suture.
In summary, it is reasonable for a company to do what’s necessary to increase profitability, sell more of its entire portfolio, and create a stable demand. All companies want to achieve these objectives. Where the issue arises is when better performing products are locked out by the bundled products under contract. This can cause overall healthcare costs to increase and possibly put the best quality health outcomes at risk.
Quick Review
Bundling ensures reliable, steady demand for products and allows Manufacturers to invest in infrastructure and maintain a high-quality labor force.
Bundling and creating a high demand essentially shields the product from competition.
Bundling less-effective products can lead to higher healthcare costs and compromised patient outcomes.
Bundling from the Distributor’s perspective …
[Note: Comments in this section are primarily focused on medical-surgical distribution. I am not addressing food, drug, office supplies, lab supplies, and other Distributors that supply healthcare providers.]
Medical supply Distributors primarily make their money from the following sources:
Product Mark-Up -- The mark-up on products they stock and deliver to the Provider is usually stated as a percentage of the product price [usually the contract price set by either a GPO or Manufacturer]. This percentage can vary widely but often, for larger hospital systems, ranges from 1-4%.
Fees -- Distributors charge a fee to the Manufacturer for various reasons, including promotion or support of their products and/or sales support.
Payment Terms –Since all customers have different contract prices for their products, the Distributor purchases product from the Manufacturer “at list”. They often get payment terms, for example, of 1.5% net-10 or 2% pre-pay. [Note: Distributors do not get these terms from all Manufacturers]. They then sell the product to the Provider at the contract price, which is usually lower than “list”, and receive a credit from the Manufacturer for the difference between “list” and actual “sell” price. Note that they took terms on “list” then were credited back the difference in “sell” price, generating income.
Bulk Buying -- By purchasing in large volumes, Distributors get preferred pricing, again adding to their income.
Expanding Services -- In the past decade, Distributors have been purchasing Manufacturers or having their own brand applied to products for which they’ve leveraged a significantly lower price. This gives the Distributor a larger margin. Medline is an example. It started solely as a manufacturer and grew into the distribution business. They now leverage their distribution by offering 0% markup on self-manufactured and branded products and applying a higher markup for other manufacturers’ products.
Distributors have a significant challenge since their customers need for them to carry specific products the customer needs. If the Distributor fails to do that, the Provider may move the business to another Distributor. This requires all Distributors to be as “Manufacturer-neutral” as possible on the brands and products they offer.
So how does bundling play into this?
In general, a Distributor is not highly supportive of the bundling concept since it locks out their ability to sell self-branded products. In general, they’re less in control of the deals. The company that has the bundle is in a stronger position to negotiate a better contract with the Distributor. Since the Provider has committed to the bundle, the Distributor must carry those products or risk losing the account.
In summary, the Distributor stands to make less from business that is bundled with another Manufacturer. It is important to note that Distributors also use bundling to incentivize the use of their own brand of products. Most often, the Distributor is offering a 0% markup to start but may also extend rebates in these bundles.
Quick Review
Medical supply Distributors makes their money in a variety of ways.
In recent years, Distributors have been purchasing Manufacturers or having their own brand applied to products for which they’ve leveraged a significantly lower price which increases their margin.
Distributors must be as “Manufacturer-neutral” as possible.
Distributors prefer to bundle their own branded products [at higher margins] versus products from another Manufacturer.
Bundling from the Group Purchasing Organization’s perspective …
Group Purchasing Organizations [GPO] are companies that negotiate prices for drugs, devices, and other medical products, as well as services, on behalf of healthcare Providers, including hospitals, ambulatory care facilities, physician practices, nursing homes, and home health agencies.
In some cases, GPOs are owned by their member providers. More recently, GPOs have gone through Initial Public Offerings [IPO] and are now publicly traded and therefore focused on generating dividends for their shareholders.
GPOs do not take title to, or physical possession of, medical products. Their role is primarily to contract for better overall pricing and service levels than their members can achieve on their own. This reduces members’ operating expenses by cutting transaction costs and negotiating lower prices for supplies. As part of improving efficiency in the supply chain, GPOs also provide a range of additional services to healthcare providers intended to lower costs or improve operations.
GPOs are dependent on member loyalty and participation to survive. In some cases, organizations pay a nominal fee to become a member but, in almost all cases, members are given a share of the administrative fees collected. These admin fees avoid being considered “kickbacks” due to the “safe harbor law” created to protect the GPO. Admin fees collected by GPOs can vary from 1-15%, depending on the type of product or service.
As an example, a well-known national GPO used to charge a low-percentage admin fee for food and drugs and a higher percentage for medical supplies. Their average admin fee settled at about 2.5% of total sales.
The share back to hospitals and systems varies between 30% and 80% of the total admin fees collected, based on that hospital’s or hospital system’s on-contract volume and collected admin fees. Services offered to members are often paid from these “share backs” and vary widely among members. Publicly traded GPOs are very focused on driving profitability but are constrained by the competitive need to keep membership up.
So, how does all this relate to bundling? I’m pleased you asked.
Since purchases on contracts drive admin fees [which support shareholders of the GPO stock], any contract that leverages compliance and increases volume plays in favor of the GPO. It’s also easier for a GPO to manage a large, single contract with a Manufacturer versus managing several small contract accounts.
GPOs are highly sensitive to conversions since they often have a loss of admin fees in the transition. Therefore, they strive to maintain long-term relationships with larger companies and support bundling, in general. Please note: If membership is unhappy with the price, service or quality of a Manufacturer’s product[s], the GPO will support membership over the benefits described above. Retaining membership is still the “trump card’ for GPOs.
Quick Review
GPOs negotiate prices for drugs, devices, and other medical products, as well as services, on behalf of healthcare Providers.
Some GPOs are owned by its members while other are publicly traded.
By collecting administrative fees and offering a percentage of them back to Providers, GPOs help retain Providers as members.
Retaining membership is key for GPOs.
Generally speaking, GPOs support bundling since this often improves contract compliance; in turn, increasing admin fees.
Bundling from the Provider’s perspective …
Hospitals and hospital systems are focused on the following key objectives:
Reducing total operating costs which includes cost of supplies and technologies.
Identifying reliable sources of supplies and technologies.
Supplying high-quality products that produce superior patient outcomes and physician satisfaction.
Minimizing cost and risk through unnecessary conversions.
Achieving reliable sourcing with fewer staff. [This is where the support of a GPO helps fill the workload gap.]
To achieve these objectives, Providers will use one or more GPOs which tends to reduce the total number of vendors, helps minimize conversions, and identifies ways to reduce costs. The concept of bundling is often “the path of least resistance” since large companies have strong brand recognition and long histories [when that history is favorable]. It is also more efficient to work with one company than with multiple companies. Additionally, if the GPO has a bundle agreement with a company, it’s simply easier to “go with the flow” than to create your own path.
If pressed, a Provider will say they do not prefer bundled deals but would go for “best in class” if they had the resources to do so. If costs go up when pursuing “best in class”, that’s another reason to stay with the bundle.
Quick Review
Hospitals and hospital systems have multiple Key Objectives to ensure availability, reliability, cost efficiency, risk-management, physician satisfaction and improved patient outcomes.
Hospitals and hospital systems rely on multiple GPOs to better manage unnecessary conversions.
It is more efficient for hospitals and hospital systems to work with GPOs versus creating their own path.
Bundling from the Payer’s perspective …
Payers [insurance companies, Medicare, Medicaid and private-pay clients] primarily focus on:
Retaining clientele by securing them quality service at a competitive price.
Reducing healthcare costs, especially for clients/members.
Having comprehensive coverage in terms of services offered and geographical availability.
Efficient billing services.
Although payers are not as directly aware when the service-provider is using bundled contracts to purchase supplies, they are concerned about inefficiencies in the use of products as it relates to cost and customer satisfaction. When bundling means hospitals and providers are paying a premium price and/or using less favorable products, Payers may move along and contract with other Providers. Providers compete with other providers by using cost and quality as differentiating factors to gain contract awards from the Payer.
Medicare and Medicaid are the two largest purchasers of healthcare, and with costs escalating at the rate they are, payers are very concerned about rising costs and declining quality.
Quick Review
Payers strive for comprehensive coverage for its clientele, always with an eye on cost and billing efficiencies, services offered, geographical availability and improved patient outcomes.
Payers will move along to other suppliers [healthcare Providers] if premium prices are being paid for inferior products and services.
I know this has been a lengthy read and I appreciate you seeing it through to the end. For you to be successful at “beating the bundle”, it is imperative you understand the mindset of each key stakeholder. Contact us if you’ve got questions or need clarification. We’re here to serve.
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IN INSTALLMENT 3 of our How to ‘Beat the Bundle’ in Medical Supply Sales series, we’ll take a look at the most cost-effective ways to “beat the bundle”, including the three key stages you must work through to be successful.
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ABOUT LOWELL CHURCH
Lowell is a Partner and consultant with Excelerant Consulting. He is a highly creative and adaptive executive with extensive senior-level experience in Integrated Delivery Networks [IDN] and an informed perspective from the provider side of healthcare [versus the supplier side]. He has a comprehensive understanding of supply chain from raw goods-sourcing to manufacturing, distribution, Group Purchasing Organizations [GPO], provider operations, and the end use of products in patient care delivery. Lowell also understands the complexities and intricacies involved when working with GPOs, IDNs, and distribution. Well-known and highly respected in the healthcare industry, Lowell is known for driving cost-savings, growing new programs, and developing creative solutions to complex problems.
lchurch@excelerantconsulting.com
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ABOUT EXCELERANT CONSULTING
Excelerant Consulting is the go-to organization for MedTech companies looking to position products and services successfully for Value-Analysis Committees, contract acquisition, and sales modeling/execution to commercialize the launch of medical devices or services with Group Purchasing Organizations [GPO], Integrated Delivery Networks [IDN], or Regional Purchasing Coalitions [RPC]. Our clients rely on us to enhance their product positioning, navigate corporate contracting opportunities, and provide sales support to accelerate growth.
For more info, contact Excelerant Consulting at info@excelerantconsulting.com.