Henry Schein soars on healthcare consolidation, integrated delivery networks as hospital execs seek supply chain help

As hospitals go on a buying spree for physician practices, ambulatory centers and other outpatient facilities, supply chain giant Henry Schein is raking it in amid all of this consolidation.

The Melville, New York-based company's medical division, has historically focused on providing healthcare products and services to these types of businesses. It saw 2014 net sales of $1.7 billion and the company overall pulled in a profit of $466 million, about $30 million more than the previous year.

The company medical business is still led by the independent physician practice that has grown into multi-specialty offices, and the division will continue to service them as it expects that these practice models will continue to stand strong, said Bill Barr, vice president of healthcare services for Henry Schein Medical.

[Also: Henry Schein acquires $300M physician office business from Cardinal Health]

But its fastest-growing segment is within the integrated delivery network healthcare model, that, while it isn't a new concept, has gotten a big boost by the Affordable Care Act with the law's focus on a coordinated healthcare model to deliver high-quality, low-cost, cradle-to-grave care. Barr said there has been rapid growth in its IDN business in the last five to six years. Hospitals are seeking ownership across the continuum of care to make sure that patients stay healthy as they migrate out of acute care and into non-acute care settings, especially with the industry moving to value-based performance payments.

"We look at the top integrated delivery networks as our targets," he said. "That's the business we are going after. We are servicing over one-third of the top IDNs and that business continues to grow."

Henry Schein Medical believes it can be a resource to help IDNs meet cost and quality goals  – and do it in a way that doesn't create dissatisfaction among physicians who need to stay focused on patient care while adapting to a value-based model. Supply chain executives in the acute care organizations that buy physician-owned practices, clinics and ambulatory surgery centers certainly help with improving costs and efficiencies within those operations, Barr said, but they can't manage them exactly the same way.

"In the last 12 months, and I expect over the next 24 months, for there to be a heightened focus on non-acute practices and clinics and how they are incorporated into hospitals and how acute care supply chains integrate with non-acute care supply chains," he said. "While the supply chain is a small part of the overall management of a practice, it could be large headache for a practice if it's not handled properly."

Barr says Henry Schein Medical has seen more supply chain executives at the hospital level get involved with purchasing decisions at the office and clinic level to help drive greater product standardization and contract compliance across all affiliated entities, as well as lower the number of orders placed to cut invoices and streamline accounts payables. But it's important that they don't go all-out in instituting acute care supply chain processes. Those can actually be disruptive to a non-acute care office or clinic setting that's accustomed to ordering low units of higher-variety inventory multiple times a day and receiving those items quickly, he said.

Henry Schein Medical's core business for years has served practices and clinics, said Barr. "So we hope IDNs and their supply chain executives will rely on our expertise in that when it comes to integrating with those parties, and at the same time our ability to hear their goals and objectives and to come up with a response that best meets them."

[Also: Henry Schein added to S&P 500]

Dan Cummins, senior director of Spend Performance Solutions at The Advisory Board Company agrees that integration efforts should not be led from the top down. He suggests empowering "non-acute supply chain leaders and other strong resources to serve as change leaders to assist in governance and stewardship of integration and steady state operations."

Barr said that Henry Schein Medical also is ready to help hospitals quickly onboard new acquisitions. "We do a lot on the back-end as a distributor that helps hospitals get these accounts rostered and tiered correctly, and also ensure their adherence to different regulatory and legal requirements," he said. And, at the same time, it can prepare newly owned IDN clinics and physician offices to use programs and contracts that weren't available to them as individual practices, and offer reporting and services to help them improve efficiencies with regard to purchasing activities. 

In the not-too-distant future, Barr thinks chief financial officers at IDNs are going to push to create non-acute care supply chain director roles and not bundling those responsibilities with the jobs of supply chain execs who have specialized in acute care. That way there will be someone who can spearhead and own the supply chain initiatives of that growing market segment.

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"The simple economics is that the CFOs are going to want to know if their practices are operating with patient care as a first priority but also efficiently and profitably," Barr said. Henry Schein Medical will work with those new leaders to help make sure they are making wise purchasing decisions and accessing the solutions that are going to enhance the way the practices are run, he said.

Henry Schein Medical itself isn't looking to directly service the acute care space, though. Its long-term strategic agreement with Cardinal Health Inc., which provides medical products to a large segment of the hospital market, provides an avenue for it to help offer large IDNs one solution across the continuum of care.

"It is fair to say that Henry Schein was early to identify the trend of hospitals acquiring physician practices and accordingly has made a concentrated effort to focus on the larger practices which would become part of IDNs, and as a result, grow faster than the market rate," said Glen Santangelo, Healthcare Analyst at Credit Suisse. "As Henry Schein has increased its scale and enhanced its supply chain capabilities, it has positioned the company well to capitalize on this trend."

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