Becton Dickinson & Co.: VACUTAINER Systems Division
October 15, 2011
What does the DRG regulation mean for BD?
DRG regulation results in shrinking the Potential Industry Earnings (PIE) in the medical supplies industry. Prior to the DRG regulation, hospitals didn’t care about costs that were incurred in treating Medicare patients since the U.S. government was footing the bill for all the costs related to serving those patients. This allowed hospitals to not think about price while choosing the medical supplies. Hence BD could charge premium prices based on just their brand recognition without having to compete on price. However with the DRG regulation, U.S. government will not pay unlimited amount towards cost anymore, but pay based on regional and national costs for each diagnostic-related groups (DRG). As some hospitals get more efficient, it will put a pressure on the less efficient ones and force them to get efficient. Also, in the interim when hospitals are trying to achieve efficiency, they pass on the excess cost to the patients, who are not able to afford the sudden increase in their medical bills. As a result, the number of hospital admissions is on the decline as well as the average length of a patient’s hospital stay. Also, Medicare patients become more cost conscious of their treatments and would agree only to the blood tests that they absolutely need. All this together indirectly results in hospitals not needing as many medical supplies as before causing them to order fewer quantities to save on inventory holding costs. As a result the PIE shrinks even further, but the number of products in the market remains the same. Hence the medical supply companies, try to compete on price in order to reduce their inventory and increase their market share to get to the same amount of earnings as before the regulation. What is the meaning of the BD brand?
BD brand stands for quality among the end-users (lab...
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