An investor's guide to the US hospital Industry

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Part 14
An investor's guide to the US hospital Industry PART 14 OF 16

A closer look at medical supplies and hospital expenses

Hospitals’ supply chains

Medical supplies account for 17% of total hospital expenses. As this constitutes a substantial portion of the total cost structure, hospitals tend to focus on their supply chain to remove inefficiencies and reduce costs.

 A closer look at medical supplies and hospital expenses

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Hospitals sourcing contracts through group purchasing organizations (or GPOs) amount to more than $100 billion in value. According to the 2014–2015 economic report on pharmaceutical wholesalers and specialty distributors, the wholesale distribution industry is about $300 billion in value with AmerisourceBergen (ABC), McKesson (MCK), and Cardinal Health (CAH) accounting for 85% of the total business. With such large amounts at stake, McKinsey & Company claims that hospitals can improve profit margins from 12% to 21% by improving their supply chain.

Cost-savings using GPO

According to Healthcare Supply Chain Association (or HSCA), GPOs act as an intermediary for about 71.71% to 80% of the total hospital dollars spent on medical supplies. GPOs make use of economies of scale, greater negotiating power, higher expertise in purchasing function, and lower combined administrative costs to reduce the cost of procurement of the supplies.

This translates in savings of 10% to 18% of the total supplies-related expenses for the hospitals. In 2012, this saving was estimated to be about $25 billion to $55.2 billion. Novation Companies (NOVC), Premier Inc. (PINC), MedAssets Inc (MDAS), HealthTrust, and Amerinet Inc. are the five leading GPOs in the U.S. based on number of hospital beds.

Hospitals and distributors

There are two types of distributors in the healthcare industry—namely, full-line wholesalers and specialty distributors. Full-line wholesalers purchase, store, and sell off manufacturers’ entire drug product line to a pharmacy or to hospitals through a GPO. Specialty distributors provide specialty drugs, used to treat chronic or difficult health conditions, to physicians and hospitals.

Oncology drugs account for 50% of the total sales of specialty distributors. According to Modern Distribution Management, AmerisourceBergen Corporation’s Specialty Group and McKesson Specialty contribute about 75% of the total specialty distributor sales. These are specialty divisions of full-line wholesalers.


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