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Even before VHA Inc. began announcing the new lineup of its authorized distribution agent, or ADA, program for medical-surgical supplies, many in the industry were questioning the wisdom of signing such large national agreements. Med-surg distribution, it has been argued, has become a local affair, albeit one predominantly operated by huge national corporations that offer a range of services, often at low margins.

For their part, distributors rely heavily on ADA-type programs as a means of formalizing their distribution contracts and as a way of maintaining revenue streams. For example, nearly half of the $3 billion in annual revenues reported by Owens & Minor Inc., Richmond, Va., are derived from its business with VHA-member hospitals. Dependence on the $2 billion annual VHA business is similar among the group's other ADAs.

Currently, Irving, Texas-based VHA, the nation's second largest buying group, lists as its authorized distributors Allegiance Corp., McGaw Park, Ill.; Burrows Co., Wheeling, Ill.; McKesson General Medical Corp., Richmond, Va.; Bergen Brunswig Medical Corp., Orange, Calif.; (now Cardinal Bergen Health Inc.), and Shared Service Systems, Omaha, Neb., in addition to Owens & Minor.

Most other large group purchasing organizations also have formalized distribution programs. One of those is St. Louis-based AmeriNet, where Bud Bowen, the group's executive vice president, says his group has national agreements with every national distributor pius "certain strong regionals" such as Claflin Co., East Providence, R.I.

Bowen says service, not price, is the prime issue that GPOs consider when bargaining with med-surg distributors. "Once a hospital signs on with a distributor, that hospital rarely switches," he says. "The relationship becomes personal and intimate." Bowen says distributors got themselves into financial trouble by promising their customers too much. And, he insists, they keep making those promises when the time comes to negotiate new agreements. "Distributors are very competitive and when it comes time for the hunt, they can't seem to keep themselves from promising too much, even when they realize that's exactly what got them into trouble in the past."

Executives at two of VHA's largest authorized distributors agree on the need for an ADA-type program. At Allegiance, the nation's largest med-surg distributor, Tony Kesman, corporate vice president of distribution, says "We at Allegiance feel we are a leader in customer logistics solutions and [national distribution agreements like VHA's ADA program] give us a chance to work with these customers."

Ron Labrum, group vice president of U.S. distribution for Allegiance, says groups have different views concerning their role in med-surg distribution. "It's a mixed bag with GPOs," he says. "Premier uses products to drive its contracts and may deal with distribution later on. Distribution is not Premier's foremost area, though VHA has its large distribution program." He calls distribution at Nashville, Tenn.-based Columbia/HCA "a mixed bag." So far, that bag contains mostly service provided by Allegiance rival Owens & Minor.

At Owens, Tom Sherry, that company's senior vice president, customer care, feels that from a revenue standpoint it remains to the advantage of GPOs to sanction national distribution agreements like the ADA program successfully operated by VHA. It is important for a distributor to have access to a GPO contract, says Sherry. He questions, however, whether the hospital customer perceives value in the ADA program. "Exclusivity for distributors is a benefit, providing the customers are compliant," he says. "But exclusivity doesn't drive compliance, service does."

The local customer makes the ultimate decision on its distribution partners, he says. "The selection of a distributor is based on performance, no matter what its GPO says."