Manufacturing a New Industry

Cuts. Cuts. Cuts. A quick scan of this issue — and the many editions before it — reveals the latest moves by others to cut the cost of care that you deliver.

How is a provider to respond? Unfortunately, Paul Newman’s words in the movie “Cool Hand Luke” come to mind. Battered, bruised and nearly broken, Luke says to the Man from his knees, “Thank you, sir. May I have another?”

Indeed, providers are left with little recourse. You’ve been tightening your belt for so long you’re wearing the buckle in the back. With no more room to squeeze, you must look elsewhere. Surely manufacturers can contribute with lower prices for their products.

Like hardboiled eggs down Cool-Hand’s throat, maybe you can push just one more concession on to your vendors. If this “solution” seems feasible at the end of this article, what I’ll have here is a “failure to communicate.”

Cost-Cutting Cards Have Been Played

CMS’ approach is very simple: follow the money and whittle reimbursement where dollars are most significant. The push tumbles a domino onto the provider, who then pushes the manufacturer to deliver lower-cost products. But, the provider’s domino comes with stipulations. Providers do not want cheaper products; the demand to manufacturers is that they not degrade quality. In fact, longer warrantees are also a requirement.

And the manufacturer? Well, not your problem, right? You’ve got enough to worry about. Besides, you can’t trust those metal-bending scoundrels. While you struggle with cuts, they’re out there spending money trying to bypass you altogether and sell directly to your patients.

Conventional thinking is that a manufacturer’s job is to make, sell and service what providers need. They’re big companies with clever engineers. Surely they can make cheaper, better, quieter, faster, smaller, longer-lasting products. And while they’re at it, they need to design them so as not to obsolete existing inventories of parts and supplies.

Luke? Luke! Wake up, the warden’s here.

Sorry to add to your many issues, but as of now, there’s an additional patient the home care provider must serve, one that seems counterintuitive to help. It’s your manufacturers. With their health and prosperity comes yours. The reverse is no longer true.

The stark reality is that for manufacturers, the cost-cutting cards have already been played — in spades. Manufacturers’ finance, operations and efficiency experts began drastically cutting costs years ago.

They began with mergers and subsequent downsizing. The cost-cutting involved blending two companies to purge redundant functions. No need for two receptionists. Who needs two management staffs? Or 10 models of CPAPs when five will do? As with any good exercise regimen, the merger process involved repetition: a second merger, a third, repeat.

Manufacturers have sliced staffs, reduced model counts and engineered their products to need fewer components. Today’s oxygen concentrator has far fewer parts and costs only half as much as a decade ago.

A Brand New Way of Thinking

Can manufacturers cut further? Sure. But only at your expense. When you say to your vendor, “You’ll need to beat ACME, who’s offering 50 cents per unit less,” the $30 or $40 you’re likely to pocket might be 30 to 40 percent of the manufacturer’s gross profit on the item. When manufacturers compete at that level, it translates into forced reductions in areas such as research and development. Say goodbye to better, faster and cheaper.

Your manufacturers want to do business with you. They truly do. But the provider mandate for lower and lower costs leaves them with little room to manage. As the late Sister Irene Kraus of the Daughters of Charity put it, “No margin, no mission.” Neither provider nor manufacturer can serve customer needs without profit. Realizing the cost sensitivity that’s become the norm in home care, manufacturers, too, are evaluating their scant few options.

With the necessity to grow, one option for manufacturers (though not dealer-preferred), is to expand the universe of buyers. In home care, that means marketing directly to patients, thereby turning them into informed, brand-preferring decision-makers. If ACME can cause patients to ask for its product and its cool features, ACME will win more sales. We’re seeing it more and more in the industry. Television commercials lead to patient inquiries and brand selection.

As a provider, you feel betrayed when you see your long-time compatriots targeting your market without you. But, like you, manufacturers are charting survival in this rapidly changing environment. Like it or not, they are contemplating an industry both with and without dealers as the gatekeepers for product decision-making. Cost-first providers are forcing them to do so. How? Let’s look into the worst-case crystal ball.

Let’s assume continued reimbursement cuts. (There’s a safe bet.) In response, the strapped home care provider buys lowest-cost products and cuts visits to the bone. In this worst case, we have survival of the skinniest. But around comes the cycle. Due to newly captured efficiencies by many, CMS finds room once again for cost-of-care reductions. And so it goes. In this model, those manufacturer management teams who consistently yielded to price concessions may find themselves replaced by new leadership.

Option B is for providers and manufacturers to pull back from the magnetic but perilous draw of cost fixation and, instead, drive toward better, more patient-friendly products. Here (and today’s reality), manufacturers target physicians and patients — even payers — to build demand directly for more advanced product and service solutions.

The aim is to create brand and product demand using what marketers call a “pull-through” strategy. That is, they target the user in order to get the store to carry the product. The aim is for patients to come to you demanding the SuperX49 rather than your selecting and providing only the cheaper, less-featured SlimX01.

Near term, this strategy appears to be, at best, disloyalty by manufacturers, the very folks who have long prospered from your allegiance. Elevating product costs combined with reduced reimbursements appears to be an equation for quicker insolvency.

But if one looks beyond the short term, manufacturers are ultimately laying the path out of the current lose-lose cycle. By designing and marketing products patients will desire, demand is generated for increasingly better, more efficacious products. Higher patient satisfaction with their therapies will mean both improved compliance and, ultimately, better health. And is that not the best way to reduce health care costs overall?

A Parallel Universe

For a parallel, let’s look at the auto industry. Not so long ago, auto dealers could earn a nice profit on sales of new cars. Then almost overnight, the Internet took from the dealer their way of earning income. Gone were the good old days of the status quo. Stories predicting dealer demise were plentiful. Forecasts of people buying directly from Detroit were sky-falling hype. Dealers, it turns out, proved irreplaceable because of the critical component only they could provide: service.

With manufacturers marketing increasingly advanced products to consumers, demand for niceties and creature features increased, and so, too, the need to support and service these more complex products. Today, the auto dealer’s income has shifted from the showroom to the service bay.

Of course there are many differences between the home care and auto industries. The point is that every industry since the start of commerce eventually faces dynamic change. Given that patient counts are on the rise, the chief indicator for market success, i.e., “demand,” bodes well for those who can navigate through current turbulence.

So what’s a home care company to do? The practical answer is that providers will serve themselves long term in direct proportion to their ability to embrace new technologies and new approaches. Both are necessary to accelerate change in what today is a business climate favorable to no one.

Let’s learn from our friends at auto dealerships. The future is service and diagnostics. Study your business strengths and weaknesses, methodically add better products, higher-end services and, where appropriate, offer clinical diagnostic and data collection in support of your referral sources.

Maybe the hardest thing to do, but one that is quite necessary for your well being, is to come to grips with the fact that, in some product categories, manufacturers really can market and sell direct to consumers. Don’t take it personally. Consider this, too, to be diagnostic. Market dynamics are working to show you your areas of value weakness. Just as auto dealers shouldn’t attempt to sell CDs that go in the CD player, there are some products sitting in your inventory that need to be ejected. Work your way out of those offerings and concentrate on how/where you are irreplaceable.

The home care industry must break free from the shackles of cost focus. Providers and manufacturers must concentrate in tandem on delivering what will be most desired and effective for the patient.

Create demand of the people, by the people, and products for the people. Washington will listen. Now, wouldn’t that be a cool hand, Luke?!

Terry Pageler is president of Pageler & Companies Inc., a data-driven business development company in Lenexa, Kan., focused on health care product and service providers. Pageler holds a master’s degree in marketing from the University of Kansas, where he also teaches graduate-level courses in strategic management and brand strategy. He can be reached at 913/829-8020 or by e-mail at [email protected].