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Weekly UpdatesCaught between rising costs for healthcare and increasing pressure on margins, pharmaceutical distribution companies continue to report increased revenues year after year. The reason lies in providing competitive services to customers, identifying competitive products and leveraging a timely information database. David Yost, president and CEO of Valley Forge, PA-based pharmaceutical distribution company AmerisourceBergen, says, "With margins being so low, it becomes difficult to differentiate yourself on price, so service becomes a crucial issue." With two competitors--Cardinal Health and McKesson--angling for market share, Yost believes that his company can only distinguish itself on prompt service, since the price offered by its peers is more or less the same.
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In a business that depends heavily on reliable logistics, having the right information database is essential because inventories carry substantial weight on balance sheets and need to be moved along the supply chain. Yost, a 35-year industry veteran, has watched the pharmaceutical distribution industry roll up into a three-player arena--from 150 or so companies earlier that couldn't survive the cutthroat competition. Together, the three comprise about three-fourths of the distribution business.
Ever since Yost took over as the CEO of AmerisonrceBergen in 2001, after Amerisource Health Corporation merged with California-based Bergen Brunswig in a $7 billion deal, he has concentrated on improving the company's position by bringing new and innovative products and services to its customers and sprucing up efficiencies throughout its distribution network. "When Bob Martini [Bergen's chairman] and I sat down to put this together, it was never about being the biggest; it was always about being the best. And sometimes bigger can help you be the best," he told Drug Store News in 2001.
Starting with operating revenues of $14 billion in 2000 (they were $70 billion in 2008) and a workforce of 10,900 employees, the company now boasts a 20 percent market share of the pharmaceutical distribution business, with 25 facilitating centers and a diverse mix of customers from across the U.S., as well as in Canada and other selected global markets. It serves as many as 27,000 pharmacies and physicians every day.
Industry analysts believe that the emerging trend of preferring generic drugs is mostly complemented by the current economic situation. Additionally, given the stringent state of FDA approvals for drugs, more and more companies are likely to be encouraged to produce generic products. According to Pharmaceutical Commerce, an industry magazine, generic drug utilization is slated to boom in the next few years. Yost aims to make the most of AmerisourceBergen's distribution of $69 billion of generic drugs slated to lose patent protection by 2011.
Another growth driver for the company, Yost believes, is the specialty drugs domain, and especially oncology drugs, which represents $14.6 billion of total revenue for the company. Half of that amount comes from the distribution of oncology products. AmerisourceBergen boasts that it is the largest distributor of oncology products in the U.S., delivering products to more than 4,600 oncologists, and it is often cited as the leader in specialty (oncology) product distribution.
The company believes the oncology pipeline is the strongest among all the pharmaceutical products it distributes, with 750 medicines in development for cancer treatment, compared to 388 for other infectious diseases. Company estimates are that the market for oncology drugs alone will be roughly $80 billion annually by 2012. Currently, oncology drugs are only 2 percent of company revenue, leaving room to grow as new drugs come on the market.
The company also tries to differentiate itself from its competitors by offering more lucrative terms to both independent drugstores and regional chains. Yost points to the company's "Good Neighbor Pharmacy" program. The proof, he says, is evident in the number of enrollments the company has made under its new program. About 3,000 drugstores have enrolled over the last year, with another 600 stores expected to come into the fold. "This is truly our secret sauce of success," reckons Yost.
Although the company has continued to expand beyond its core wholesale pharmaceutical distribution business--pharmaceutical packaging and specialty pharmaceutical services--by completing as many as seven acquisition deals, valued collectively at $358.9 million, in 2008, most of its revenues--about 96 percent of the total--still come from its core distribution business.
Yost comes across as a down-to-earth yeoman CEO, plain and frugal, with no company jets. He draws a relatively modest compensation of $5.1 million, in comparison to his peers in the industry ($44.1 million for McKesson CEO John Hammer-green and $11.06 million for Cardinal CEO Kerry Clark). Yost's strategy from the beginning has been to control costs and decentralize the organizational structure to maximize efficiency. After the merger, he implemented new technology programs to centralize procurement and data processing, and increased operating profits from $703.2 million in 2001 to $2.0 billion in 2002.
To ensure further cost efficiency and customer satisfaction, Yost reduced the number of distribution centers from 52 in 2001 to 30 in 2007 by automating most of the processes. And he will invest $100 million over the next three to four years to improve customer service technology. Since no single product offers an advantage, Yost maintains that for AmerisourceBergen, sustainability is attained only through offering better service.
From Scrubs to Pinstripes
The recession has not been kind to most businesses but hospitals have fared worse. Although healthcare costs have gone up 10 percent per year in recent years, shooting national costs to 17 percent of GDP, up to one-third of total hospital costs are said to be wasted or spent inefficiently. Many patients in poorer areas cannot afford necessary treatment and others are deferring elective procedures. Then there is the vexing problem of collecting payments from third-party payers, not to mention government programs such as Medicare and Medicaid. In addition, many hospitals have too many beds chasing too few patients, forcing some to consolidate.
Ralph de la Torre, 43, a cardiac surgeon who studied biomedical engineering as an undergraduate at Duke University before earning graduate degrees from Harvard Medical School and Massachusetts Institute of Technology, thinks he has a solution--or at least a part of one. In April 2008, he was picked by the Catholic Archdiocese of Boston to become president and CEO of Newton-based nonprofit Caritas Christi Health Care, New England's largest network of community-based hospitals, with an annual revenue base of $1.5 billion. With 12,000 employees, Caritas Christi is also the 1lth largest employer in Massachusetts.
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Despite not having formal management training or experience, de la Torre had an immediate impact. Caritas was a chronically weak and financially struggling operation that lost $26 million in the fiscal year ending in September 2008. However, for the quarter that ended in March 2009 it reported a profit of $10 million and its operating margin for the quarter reached 4 percent-compared to the Massachusetts norm of less than 1 percent. In addition, the group added another $50 million to the seven-hospital group's bottom line.
Even before turning in his scrubs for pinstripes, de la Torre had his own ideas about how hospitals could be run more efficiently. From Boston Medical Center, he moved to Beth Israel Deaconess Medical Center, where after four years he became chief of cardiac surgery. Later, he expanded that role to run the cardiovascular institute there. (He had performed about 300 heart surgeries a year before taking the Caritas job as president and CEO.) His basic strategy was simple: Cut operating costs by 4 percent by outsourcing such operations as billing, claims, processing and lab work. In addition, he instituted tighter control over inventory and purchasing, and reduced unnecessary headcount in Caritas' then-13,000-employee system. But anyone can cut costs. He also wanted to use new medical and information technology to close the efficiency and quality gap with bigger research hospitals that tend to be the marquee brand leaders. (Caritas serves working communities in six towns surrounding Boston.)
One of his initiatives was a two-and-half-year $70 million IT project to make Caritas entirely paperless--the holy grail of many healthcare operations. Computerized records are now the norm in two of its six hospitals and about one-fourth of the doctors overall are writing electronic prescriptions. In restructuring senior management, he also leveraged his personal reputation to bring m talent from outside and recruited 113 new physicians, such as Harry Tuerk, one of the foremost robotic urologic surgeons in the world, and Joe Carozza, an interventional cardiologist who is now Caritas' new chief of cardiology. In addition, he instituted systemwide metrics to measure quality and improve patient care.
So far the effort is paying off. In comparing Caritas Christi's eight individual service lines to the University HealthSystem Consortium (UHC) database of independently estimated costs compared to charges for various services, each one is below the median UHC patient cost. Also, the group's cost per case-adjusted discharge--the Case Mix Index (CMI)--has come down significantly. Adjusted discharges for the quarter ended March 2009 was $6,097 compared to $6,317 during the same period in 2008, with a year-to-date figure of $6,201.
But rationalizing operations in healthcare is unlike any other endeavor in one key respect. "If you own a Ford dealership and the economy collapses, you just don't sell cars, but in healthcare, people come to you and say, You got to give the cars away now,'" de la Torre observes. "When people go from being employed and insured to unemployed and not insured, you still have to take care of them. You just don't get paid."
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