1-800-CONTACTS and the Terrible, Horrible, No Good, Very Bad Unilateral Pricing Policy
So over the weekend I read this article about a legislative fight in Oregon: http://www.oregonlive.com/mapes/index.ssf/2015/01/fight_over_contact_lens_pricin.html. Basically 1-800-CONTACTS is presenting a bill into the Oregon State Legislature trying to make it illegal in that state for manufacturers to set a unilateral pricing policy. I predicted this in JUNE: http://myeyepod.blogspot.com/2014/07/has-1-800-contacts-bubble-burst.html. Here's the jist of it if you're a consumer and you want to understand how this affects you. In the 90's when disposable soft contacts became all the rage, OD's were making a killing selling contacts. Along came 1-800-CONTACTS who negotiated deals directly with the contact lens manufacturers (mainly Johnson & Johnson for their Acuvue products, but all of the big manufactuers eventually followed suit). They were able to get special pricing from J&J because they bought in bulk. Hundreds of thousands of boxes all at once for a very low price, to be warehoused and sold directly to consumers, bypassing the OD's. First by phone (hence the now-antiquated "1-800" moniker because who these days is really all that worried about long distance charges?) and then later on the web. Contact lens prices plummeted. Patients benefitted. Now 1-800-CONTACTS (and others) made a killing. OD's lost a major source of revenue. So much revenue, in fact, that to make up for it the docs came up with "contact lens fitting fees" because they literally couldn't afford to spend the time and effort on the exam and follow up visits only to have the patient "walk" with their Rx and buy contacts from 1-800-CONTACTS for literally less than the OD could buy them from J&J. The market stayed this way basically for most of the 90's and all of the 2000's with 1-800-CONTACTS making plenty of money. This did not please OD's for many reasons: one is the obvious cut in revenue. But there were others: 1-800-CONTACTS marketed directly to the consumer. They did (and do) shady things to sell contacts. For instance: when you order a box of contacts, they are required to contact your OD to "verify" the Rx. Contacts are medical devices and need to fit correctly, etc and laws are in place to make sure that you are ordering and 1-800-CONTACTS is selling you the contacts your doctor Rx'd...not just whatever you want or whatever is the cheapest or whatever 1-800-CONTACTS makes the most money on or has in stock. In most states if the doctor does not respond to the verification request within 48 hrs, 1-800-CONTACTS has the right to "fill" the Rx w/o the verification. They call this "passive verification". In other words, if the OD doesn't respond they are assuming the OD is okay with it. Well take a guess when 1-800-CONTACTS would fax the verification request? How about Friday at 5:15pm? Then by Sunday at 5:15pm they are ready to ship! Monday at 9am when the fax machine is checked and it turns out the patient hasn't had an eye exam in 3.5 years...TOO LATE! The order has been shipped! Genius. These and other practices made the OD's and the 1-800 companies virtual enemies. The OD's were no saints, either. They invented the idea of "private label" contacts...negotiating a SEPARATE deal directly with a contact lens manufacturer to have contacts "branded" under a different name so that they are not available to be bought from 1-800-CONTACTS at all. It was a game and both sides were playing. I even did it (had a private label brand) in the early 2000's, until I slowly realized what most OD's finally realized: there is no money in contact lens sales anymore. We don't even really try to make money on it at all. We just upped all of our exam fees (including contact lens fitting fee) to make up for the lost revenue. Fast forward to summer of 2014 when the economy was not great and contact lens sales sagged (because let's be honest here: when things are bad people will wear their old glasses instead of spending money on new contacts). The contact lens manufacturers were hurting a little and J&J and Alcon both had new products they were trying to get docs to Rx. Each of those companies instituted a "unilateral pricing policy": the three words that I knew would hurt 1-800-CONTACTS. Unilateral pricing means nobody gets a sweetheart deal. It used to be that the more boxes you bought at one time directly from the manufacturer, the less each box cost. Buy 1 box: get Price A. Buy 50 boxes: get Price A-15%. Buy 100 boxes get Price A-20% and so on. Well the way that the 1-800-CONTACTS model works is based on bulk purchasing. They buy 10,000 boxes at a time and getting HUGE, HUGE discounts for doing it. Then they warehouse the lenses and sell them piecemeal direct to the consumer for less than anyone else can offer. The old pricing policy is literally what drives 1-800-CONTACTS! I knew the instant I saw the words "unilateral pricing policy" that the folks who were going down were the 1-800's. And now of course it turns out that it's true. 1-800-CONTACTS has put up a bill in Oregon. They want to make "unilateral pricing policies" illegal in that state. WONDER WHY THEY WOULD WANT TO DO THIS? Because they lost their advantage. Now they cannot buy a box of contacts any cheaper than anyone else can...AND SO THEY CAN'T SELL THEM ANY CHEAPER, EITHER. If the price of the box is literally the same cost from your OD as it is from a mail-order place...why would anyone order online? If the cost is the same, why would a patient want to wait 5 days and sign for a UPS package, etc from 1-800-CONTACTS when they could have their OD hand them a box on the spot? The answer of course is that they wouldn't. So I can only presume 1-800-CONTACTS is being financillay impacted by this. I don't have any data except that it's a pretty obvious and logical scenario, and I predicted it in June, and now 1-800-CONTACTS is lobbying in Oregon. Hmm. They're doing it under the guise that they are championing the cause of the poor contact lens patient who just wants to save some money. The problem, of course, is that they are trying to control the pricing of a product they sell...BUT DON'T MANUFACTURE. Sure prices are going up. It's true. But as I alluded to earlier, prices are going up b/c demand is down, and the lower demand has made the manufacturers need to increase cost in order to offset the lower demand. So here is 1-800-CONTACTS trying to make it ILLEGAL for the manufacturers to set their OWN PRICING for the products THEY MAKE. Uh...does anyone else see a problem here? I mean I know Oregon is a blue state but this is not socialism. Under a free market system you cannot force a manufacturer to sell their own product at a price that *YOU* deteremine. But of course they know Oregon is a kind of liberal market that may be swayed by a "think of the children!" campaign and they are trying to set a precedent for the coming fights in other states, or at least that's my conspiracy theory. Regardless, 1-800-CONTACTS is hurting and they're making moves to try and make unilateral pricing policies illegal. They don't care if it ostracizes the prescribing OD's (they did that a long time ago) or even the manufacturers! They're desperate. They MUST have their special sweetheart pricing deal in order for their model to work. Without the special pricing their whole system falls apart because they have no advantage and therefore no niche. And it must be falling apart for them to be fighing so hard spending big bucks on lobbying to try and hilariously force a manufacturer to be UNABLE TO SET THEIR OWN PRICING! They can pretend it's "for the patients", but it's not. They're not making any money and they're desperate. So...the 1-800-CONTACTS bubble REALLY is bursting.