Chris Oleksy, Founder and CEO, Oleksy Enterprises and Next Life Medical; CEO, Emergent Respiratory05.03.18
For the past 35 years or so, supply chain consolidation has become an integral part of the medtech industry. Far less common but increasing in frequency is the desire by non-healthcare entities like Amazon, Apple, CVS, Google, and most recently, Walmart, to move into the medical space. At the MPO Summit last fall, and in many of my columns and presentations throughout my career, I have voiced concern about an unhealthy transfer of focus from patient care to P&L statements and balance sheets. I’ve said repeatedly that such a change in focus could threaten world markets and evoke another financial type crisis. This quandary, however, not only puts 401ks at risk but human health as well.
My goal in writing this column is to help medtech companies make sense of and navigate the rapidly changing supply chain landscape.
As I mentioned at the Summit, the 2008 banking crisis was basically caused by P&L and balance sheet “creativity.” Fiddling with the financial system by creating sub-prime mortgages that turned into risky—and ultimately unsuccessful—investments created the largest bankruptcy in U.S. history and triggered a worldwide financial pandemic whose recovery lasted nearly eight years. Similarly, fiddling with the levers of healthcare is a risky proposition, and Washington (through Obamacare) unwisely tinkered with an industry that is more than 20 percent of America’s gross domestic product. The government’s involvement set into motion a movement that is forcing care chain players (both new and old) down a dangerously familiar path towards P&L/balance sheet “creativity.”
In Obamacare’s aftermath, I’ve been predicting the consolidation of “care chain” elements and some for survival purposes. Keep in mind though, that care chain consolidations differ from supply chain OEM consolidations (i.e., Medtronic Inc. buying Covidien plc or BD acquiring CR Bard Inc.), as those unions entail supply chain players acquiring a competitive or complimentary supplier and leveraging economies of scale (a positive move). Care chain consolidation involves up or downstream vertical integrations like CVS-Aetna or (possibly) Walmart-Humana. These are examples of two mutually exclusive care chain players using consolidation to manage or control more of the healthcare delivery process. Configured correctly, these pairings could be very positive for the industry, but the wrong configuration could have disastrous consequences for healthcare. The key determinant will be the configurations themselves and how they could impact patient care decisions in the future.
As a supply chain expert and OEM owner, I believe that organizations like Amazon and Walmart can serve an important role in the future care chain. Amazon’s distribution strength and Walmart’s retail footprint can provide incredibly important elements within future healthcare chains. If these entities, or others, become care chain owners through acquisition, however, and change the focus from patient care to logistics/operational excellence, then our overall healthcare will truly be at risk.
In Network vs. Out of Network = The Norm
A possible effect of the Walmart-Humana marriage would be Walmart—the acquiring entity—requiring Humana participants to purchase goods exclusively from the retail giant’s locations as “in-network” expenses. That would be the most sensible supply chain configuration because Walmart’s volume purchasing power and distribution strength can actually reduce care chain costs. Although such a configuration wouldn’t prevent Humana participants from going elsewhere, they would be subject to competitors’ prices. The same philosophy would apply to a CVS “in-network” mandate for Aetna participants.
For a better understanding, consider this real life example: I am a member of Sam’s Club, which is owned by Walmart. I pay an annual fee for this membership. If I want a branded non-bulk item that Sam’s Club does not carry, I have the right to shop at Target, Acme, XYZ Store, or any other retailer for my item. I might pay more for the item, but that would be one of the consequences of my choice. An actual Walmart-Humana care chain configuration could look identical to this. For proof, ponder the following hypothetical scenario: A caregiver prescribes to me the cholesterol-lowering statin Lipitor, made by Pfizer but my insurer (Walmart-Humana) will only cover a cheaper generic brand called Member’s Mark. However, I’m not convinced of the generic brand’s efficacy so I want Lipitor, which I’ve taken for years and is considered a trusted brand by my doctor. I have the right to buy the more expensive Lipitor elsewhere (perhaps at Target) but I’ll have to pay the price difference. Why? Profits and losses, quite simply. In this case, Walmart—which has made its fortunes on logistics/operational excellence (its DNA)—is selling Member’s Mark rather than Lipitor because it negotiated a deal with the former drug’s manufacturer. This is commonplace for organizations leveraging spend on commodity items.
The aforementioned example doesn’t have many far-reaching implications. The patient in this instance (me) is getting his prescribed statin, regardless of whether the drug is generic or brand-name. And the cost differential isn’t too concerning.
Tail Wagging the Dog
However, my concerns would grow significantly if patient care and reimbursement decisions are dictated by Walmart (i.e., what the retailer deems appropriate and makes available). As the acquirer, Walmart certainly could have that power over Humana to drive key decisions. Keep in mind that Walmart’s DNA is based in operational, P&L/balance sheet excellence, not patient-centric care. Basing appropriate care on balance sheets and operational excellence could result in a misconfigured care chain and ultimately negatively affect both the company and Humana participants. Don’t misunderstand me; Walmart has an incredible supply chain. But the blue vests at Walmart are no substitute for Humana healthcare experts or Mayo Clinic doctors. If they are allowed to proceed, Walmart must make wise use of Humana expertise to ensure that patient care remains the focus of its reconfigured care chain. After all, there is a big difference between buying generic gauze from China and deciding on pacemakers or the appropriate surgery. Simply put, it’s the configuration of the patient care decision that will make or break this type of care chain.
Tips for Suppliers and OEMs
My Achy Breaky Heart
I cherished my career at Dow Corning because of the science of silicone and its remarkable ability to restore the human body. The life-changing material gave breast cancer patients new confidence, burn victims new skin, and accident victims new joints. I joined Medtronic plc because of Bill George and Art Collins, who created value for their care chains without compromising patient care. They regularly recited (and abided by) the Medtronic mission of restoring patients to “full life”—an objective that has had a positive effect on the company’s finances. In essence, they warned against letting the tail wag the dog.
Like singer-songwriter Billy Ray Cyrus, I have an achy breaky heart as well, but the reasons for my sorrow have nothing to do with romance. My heart aches and breaks with much of what has transpired over the past 10 years in healthcare but I’m adapting (or re-configuring) the best I can, which admittedly is a work in process. Almost daily I hear stories about corporate finance departments or payers dictating profits and balance sheets more so than patient care. Although no business is successful without a solid P&L and balance sheet, I believe that too much of today’s healthcare system is based on the tail (P&L/balance sheet) wagging the dog (caregivers).
Let’s hope that as the world’s care chains consolidate, they retain their patient-centric care focus. My personal hope is that CVS or Walmart will add to its mix—either by acquisition or alliance—companies with established patient-centric pedigrees like Medtronic, Boston Scientific Corp., Abbott Laboratories, J&J, etc. Also important to reconfigured care chains are relationships with the Mayo Clinic, Cleveland Clinic, Penn Medicine, and others, as well as diversified contract manufacturers.
The good news in all of this is that a capitalistic free enterprise system will provide much-needed choice for insured patients. If one care chain isn’t the right fit for an organization, there will likely be other options to choose from.
To conclude, I’d like to offer my assistance to Doug McMillon of Walmart, Jeff Bezos of Amazon, Warren Buffet, Jamie Dimon, Bill Gates of Microsoft, and several others who might be thinking of entering the medtech space. Vertical integration is not the only answer; rather, the key is supply chain + value chain + care chain alignment. It simply is not possible for companies to vertically integrate all elements and have world-class offerings. Those that follow this strategy will end up being average at all things and not above average at any one thing. Try a value stream approach instead—vertically integrate some portions while forming alliances with others to create a best-in-class solution. Follow the example of Earl Bakken, Bill George, Art Collins, Paul Zoll, and the Johnson brothers: Put the patient first and let Lassie wag her own tail. The reward is well worth it.
Chris Oleksy is the founder and CEO of Oleksy Enterprises, Next Life Medical, and Emergent Respiratory. He can be reached at chris@oleksyenterprises.com or chris@nextlifemedical.com.
My goal in writing this column is to help medtech companies make sense of and navigate the rapidly changing supply chain landscape.
As I mentioned at the Summit, the 2008 banking crisis was basically caused by P&L and balance sheet “creativity.” Fiddling with the financial system by creating sub-prime mortgages that turned into risky—and ultimately unsuccessful—investments created the largest bankruptcy in U.S. history and triggered a worldwide financial pandemic whose recovery lasted nearly eight years. Similarly, fiddling with the levers of healthcare is a risky proposition, and Washington (through Obamacare) unwisely tinkered with an industry that is more than 20 percent of America’s gross domestic product. The government’s involvement set into motion a movement that is forcing care chain players (both new and old) down a dangerously familiar path towards P&L/balance sheet “creativity.”
In Obamacare’s aftermath, I’ve been predicting the consolidation of “care chain” elements and some for survival purposes. Keep in mind though, that care chain consolidations differ from supply chain OEM consolidations (i.e., Medtronic Inc. buying Covidien plc or BD acquiring CR Bard Inc.), as those unions entail supply chain players acquiring a competitive or complimentary supplier and leveraging economies of scale (a positive move). Care chain consolidation involves up or downstream vertical integrations like CVS-Aetna or (possibly) Walmart-Humana. These are examples of two mutually exclusive care chain players using consolidation to manage or control more of the healthcare delivery process. Configured correctly, these pairings could be very positive for the industry, but the wrong configuration could have disastrous consequences for healthcare. The key determinant will be the configurations themselves and how they could impact patient care decisions in the future.
As a supply chain expert and OEM owner, I believe that organizations like Amazon and Walmart can serve an important role in the future care chain. Amazon’s distribution strength and Walmart’s retail footprint can provide incredibly important elements within future healthcare chains. If these entities, or others, become care chain owners through acquisition, however, and change the focus from patient care to logistics/operational excellence, then our overall healthcare will truly be at risk.
In Network vs. Out of Network = The Norm
A possible effect of the Walmart-Humana marriage would be Walmart—the acquiring entity—requiring Humana participants to purchase goods exclusively from the retail giant’s locations as “in-network” expenses. That would be the most sensible supply chain configuration because Walmart’s volume purchasing power and distribution strength can actually reduce care chain costs. Although such a configuration wouldn’t prevent Humana participants from going elsewhere, they would be subject to competitors’ prices. The same philosophy would apply to a CVS “in-network” mandate for Aetna participants.
For a better understanding, consider this real life example: I am a member of Sam’s Club, which is owned by Walmart. I pay an annual fee for this membership. If I want a branded non-bulk item that Sam’s Club does not carry, I have the right to shop at Target, Acme, XYZ Store, or any other retailer for my item. I might pay more for the item, but that would be one of the consequences of my choice. An actual Walmart-Humana care chain configuration could look identical to this. For proof, ponder the following hypothetical scenario: A caregiver prescribes to me the cholesterol-lowering statin Lipitor, made by Pfizer but my insurer (Walmart-Humana) will only cover a cheaper generic brand called Member’s Mark. However, I’m not convinced of the generic brand’s efficacy so I want Lipitor, which I’ve taken for years and is considered a trusted brand by my doctor. I have the right to buy the more expensive Lipitor elsewhere (perhaps at Target) but I’ll have to pay the price difference. Why? Profits and losses, quite simply. In this case, Walmart—which has made its fortunes on logistics/operational excellence (its DNA)—is selling Member’s Mark rather than Lipitor because it negotiated a deal with the former drug’s manufacturer. This is commonplace for organizations leveraging spend on commodity items.
The aforementioned example doesn’t have many far-reaching implications. The patient in this instance (me) is getting his prescribed statin, regardless of whether the drug is generic or brand-name. And the cost differential isn’t too concerning.
Tail Wagging the Dog
However, my concerns would grow significantly if patient care and reimbursement decisions are dictated by Walmart (i.e., what the retailer deems appropriate and makes available). As the acquirer, Walmart certainly could have that power over Humana to drive key decisions. Keep in mind that Walmart’s DNA is based in operational, P&L/balance sheet excellence, not patient-centric care. Basing appropriate care on balance sheets and operational excellence could result in a misconfigured care chain and ultimately negatively affect both the company and Humana participants. Don’t misunderstand me; Walmart has an incredible supply chain. But the blue vests at Walmart are no substitute for Humana healthcare experts or Mayo Clinic doctors. If they are allowed to proceed, Walmart must make wise use of Humana expertise to ensure that patient care remains the focus of its reconfigured care chain. After all, there is a big difference between buying generic gauze from China and deciding on pacemakers or the appropriate surgery. Simply put, it’s the configuration of the patient care decision that will make or break this type of care chain.
Tips for Suppliers and OEMs
- If the proposed Walmart-Humana and CVS-Aetna acquisitions are allowed to proceed, suppliers and OEMs alike should be setting up meetings with these new players to determine where they might fit in to the entities’ evolving care chains.
- All medtech companies should evaluate the role of generic devices in their own organization’s offerings. Remember that white label/brand name items like Member’s Mark at Walmart and CVS Caremark are key to these organizations’ DNA.
- Consider the possibility of other players like Amazon, Apple, Google, Microsoft, and Tesla entering the healthcare arena and establishing their own care chains. What about the Cleveland Clinic or Mayo Clinic vertically integrating? Companies should be thinking out of the box about their supply chain strategies as this landscape evolves.
- If allowed to proceed, Walmart, CVS, Amazon, and other non-healthcare entities will likely be charting new paths with the U.S. Food and Drug Administration (FDA). Could this change how quality systems operate as well as the FDA approval process? Could this allow for more global medical device imports? International competence will definitely be an asset within medtech organizations going forward.
My Achy Breaky Heart
I cherished my career at Dow Corning because of the science of silicone and its remarkable ability to restore the human body. The life-changing material gave breast cancer patients new confidence, burn victims new skin, and accident victims new joints. I joined Medtronic plc because of Bill George and Art Collins, who created value for their care chains without compromising patient care. They regularly recited (and abided by) the Medtronic mission of restoring patients to “full life”—an objective that has had a positive effect on the company’s finances. In essence, they warned against letting the tail wag the dog.
Like singer-songwriter Billy Ray Cyrus, I have an achy breaky heart as well, but the reasons for my sorrow have nothing to do with romance. My heart aches and breaks with much of what has transpired over the past 10 years in healthcare but I’m adapting (or re-configuring) the best I can, which admittedly is a work in process. Almost daily I hear stories about corporate finance departments or payers dictating profits and balance sheets more so than patient care. Although no business is successful without a solid P&L and balance sheet, I believe that too much of today’s healthcare system is based on the tail (P&L/balance sheet) wagging the dog (caregivers).
Let’s hope that as the world’s care chains consolidate, they retain their patient-centric care focus. My personal hope is that CVS or Walmart will add to its mix—either by acquisition or alliance—companies with established patient-centric pedigrees like Medtronic, Boston Scientific Corp., Abbott Laboratories, J&J, etc. Also important to reconfigured care chains are relationships with the Mayo Clinic, Cleveland Clinic, Penn Medicine, and others, as well as diversified contract manufacturers.
The good news in all of this is that a capitalistic free enterprise system will provide much-needed choice for insured patients. If one care chain isn’t the right fit for an organization, there will likely be other options to choose from.
To conclude, I’d like to offer my assistance to Doug McMillon of Walmart, Jeff Bezos of Amazon, Warren Buffet, Jamie Dimon, Bill Gates of Microsoft, and several others who might be thinking of entering the medtech space. Vertical integration is not the only answer; rather, the key is supply chain + value chain + care chain alignment. It simply is not possible for companies to vertically integrate all elements and have world-class offerings. Those that follow this strategy will end up being average at all things and not above average at any one thing. Try a value stream approach instead—vertically integrate some portions while forming alliances with others to create a best-in-class solution. Follow the example of Earl Bakken, Bill George, Art Collins, Paul Zoll, and the Johnson brothers: Put the patient first and let Lassie wag her own tail. The reward is well worth it.
Chris Oleksy is the founder and CEO of Oleksy Enterprises, Next Life Medical, and Emergent Respiratory. He can be reached at chris@oleksyenterprises.com or chris@nextlifemedical.com.