Health Care Marketplaces: Will They Deliver?

SAN MATEO (07/03/2000) - A virtual turf war is breaking out in the health care industry as emerging dot-com companies, established manufacturers, distributors, and traditional brokers scramble to establish competing Internet marketplaces for buying and selling everything from Band-Aids to MRI machines.

At stake are potentially billions of dollars in revenue, savings for hospitals and their IT departments, and a controlling interest in the way health care goods are bought and sold in the future.

"Everyone is jockeying for position to see who will be the Amazon of health care," says Robert Hankin, president of the Health Industry Business Communications Council, a Phoenix-based organization aimed at developing electronic communications standards.

These Web hubs offer online catalogs, electronic auctions to buy and sell excess inventory and used equipment, specials for promotional or out-of-date goods, and sites to submit RFPs (requests for proposals) for equipment and supplies.

Unlike other industries embroiled in Internet marketplace battles, the health care Net marketers don't plug their e-commerce services as a revolutionary way to unite buyers and sellers, cut out brokers, or drive down prices. Instead, they are embracing brokers and selling the digital marketplace as an affordable, integrated procurement management system: a way to centralize product and contract information from multiple vendors, keep tabs on purchasing, and allow real-time paperless transactions.

Armed with better information, health care organizations can then negotiate better prices for goods or figure out better ways to spend their money, marketplace proponents say. That savings can make a difference for hospitals and their IT staffs, who already are under severe pressure to cut costs in the face of shrinking benefits from managed care and reimbursements from federal Medicare programs.

Scaling back the cost of inefficiency

In the Net marketers' purview, the material manager's office crammed with catalogs, requisition notes, and aging procurement systems tied to one or two suppliers is a thing of the past. Rather, they envision hospital intranets where authorized personnel can simply type in requests and buy off the Web from multiple vendors at preapproved prices from the convenience of their desktop PC.

Citing an often-quoted figure from the Efficient Healthcare Consumer Response (EHCR), a consortium of supplier, distributor, and health care provider organizations, Robert Zollars, CEO of Neoforma.com, in Santa Clara, California, says that as much as US$11 billion could be squeezed from health care costs by conducting most transactions electronically and streamlining supply-chain processes. The waste is staggering, considering that the market for medical, surgical, and pharmaceutical supplies and equipment is roughly a $500 billion-a-year business, he says.

It may not be a rabble-rousing pitch, but it may make dollars and sense. In many cases, hospital IT leaders are hamstrung, unable to help their institutions become more efficient because their own budgets are under pressure. At the same time, hospital mergers and consolidations have left administrators with an odd assortment of legacy and DOS-based procurement systems to cobble together.

"Our member [hospital's] biggest frustration is knowing what they pay, and they think the Internet is the answer," says John Burks, senior vice president of marketing, information services, and business development at Irving, Texas-based Novation, which is owned by national health care alliances VHA and University HealthSystem Consortium. "[Hospitals] can't afford to upgrade [their] purchasing systems. By connecting their legacy systems to the Internet, they get the opportunity to get a single source of [procurement] data."

Industry giants rally together

Not everyone is convinced. According to a recent report from Forrester Research, in Cambridge, Massachusetts, most hospital material managers don't see the Internet as offering significant advantages over EDI (electronic data interchange), which many already use.

To convert nonbelievers, Net marketplaces are creating interesting bedfellows:

Competitors are becoming partners. Major marketplaces include coalitions between Net marketplace makers, who in other industries eschew traditional brokers, and GPOs (group purchasing organizations), the established go-betweens of the health care supply chain.

The GPOs have become powerful players by banding together large numbers of hospitals that buy products in volume to secure manufacturer discounts. These alliances include Neoforma.com (www.neoforma.com) with GPO partner Novation; Medibuy.com (www.medibuy.com) with GPO partner Premier; Broadlane (www.broadlane.com), a joint venture of business-to-business builder Ventro and Tenet Healthcare, with GPO partner AmeriNet; and empactHealth.com (www.empacthealth.com) with partner HCA, the Healthcare Company.

Not to be outdone, five of the largest health care and pharmaceutical manufacturers announced in March that they would be creating their own electronic marketplace, dubbed the Global Healthcare Exchange. Initial partners include Johnson & Johnson, GE Medical Systems, Baxter International, Abbott Laboratories, and Medtronic. Six more have since climbed on the Net bandwagon, according to Global Healthcare Exchange General Manager Michael Mahoney. The exchange plans to unveil its first-generation site in the September time frame, Mahoney says (see interview, below).

In addition, five of the biggest industry distributors, normally fierce competitors, followed with an announcement of their own Internet marketplace, called the New Health Exchange (www.newhealth-exchange.com). They are Amerisource Health, Cardinal Health, Fisher Scientific International, McKesson HBOC, and Owens & Minor. The details have yet to be worked out, acknowledged Cardinal CIO Kathy White.

"We know it will be a neutral procurement site for all of [the] health care [industry] to try to bring the most products and services to the most health care customers," White says.

Many specialty digital marketplaces are popping up as well. Their growing ranks include I-Many.com of Portland, Maine, which focuses on contract negotiation, and MedAssets' Asset Exchange, in Wood Dale, Illinois, which focuses on refurbished medical equipment.

Transforming ancient systems

The frontlines of this battlefield are where the new Web-based approaches and old-style legacy systems meet. As an incentive to get health care organizations to buy on the Web, several Net service vendors promise to integrate the hospital's existing ERP (enterprise resource planning) systems and materials management software with their respective Net marketplace at a relatively low cost.

"The biggest challenge for any b-to-b marketplace is integration into a customer's legacy system," says Bob Witt, CIO of Medibuy .com, a San Diego-based Net marketplace. Through marketplaces, "the hospitals are getting a technology facelift at minimal cost," he says.

When hospitals use EDI to place an order and check on delivery, "they are taking a leap of faith when orders get billed to them that it will get billed at the right price,"says Glenn Wira, vice president of marketing at I-many.

EDI connections are complex, expensive, work in batch rather than real-time mode, and generally link customers to only one supplier or manufacturer, explains Simmi P. Singh, who runs the global health industry services practice at SeraNova, an Internet professional services company based in Edison, New Jersey.

Full steam ahead

Rather than waiting for Internet marketers to make their move, many health care IT professionals are looking for other ways to leverage the Web for procurement. Options include individual vendor solutions, such as a Web-based decision support system from distributor Owens & Minor, or taking their own approach (see related article, below).

Paul Peabody, CIO of William Beaumont Hospital, a two-hospital chain in metropolitan Detroit, says he's unsure about emerging Net marketplaces. But he's confident enough to invest $12 million in a hospital intranet based on Oracle's E-Business Suite. Via a Web browser, the intranet will provide authorized employees an enterprise view and a common look and feel to the data from any of the hospital's 6,000 PCs. The hospital expects to cut total operational costs by $10 million.

"We wanted to use a strategy that made sense, that would be proven," Peabody says.

Each marketplace will have to prove its value to the customer to succeed. The manufacturer and the distributor coalitions face internal political issues and possible legal issues, industry observers note.

"It's difficult for competitors to collaborate," SeraNova's Singh says.

"[Meanwhile] the dot-coms have not been able to deliver on market share, and the traditional [players] have not be able to deliver on technology."

Whether they can succeed by joining forces remains to be seen, Singh says.

Send comments to Senior Editor Susan Fisher (susan_fisher@infoworld.com).

Improving access to information

Information is the lifeblood of any supply chain. Yet health care is often plagued by poor circulation of data. With the help of the Internet, all of the links in the health care supply chain can have detailed, readily available, and potentially powerful information about the products bought and sold.

That's what health care supplies distributor Owens & Minor learned when it made an internal decision support system available to business partners via the Web.

"It's a differentiator when we bid for business," says Don Stoller, director of information management at the 118-year-old company, based in Richmond, Virginia. "If [hospitals] are going to drive costs out, they need to constantly monitor their purchasing history and constantly look at ways to drive cost out of their supply chain."

The decision support tool, dubbed WISDOM (Web Intelligence Supporting Decisions from Owens & Minor) gives suppliers and customers a window on their buying world. Through a standard Web browser and Internet connection, trading partners can access the $3.2 billion distributor's data warehouse.

The warehouse contains up-to-date information and three years of historical data on customer contracts, sales, pricing details, orders, shipments, and inventory.

WISDOM was cited among the attributes that drew TriHealth, in Cincinnati, to sign a five-year supply agreement with Owens & Minor.

"We can order supplies from anyone, but it was having the data to be able to make informed decisions that will help us move further ahead," said John Pennell, TriHealth's director of logistics management, in a statement.

Of course, Owens & Minor is not alone in realizing the Internet's value as a tool to disseminate valuable information to customers and suppliers. Other distributors are building tools that give customers and suppliers insight into the supply chain. Cardinal Health, in Dublin, Ohio, is developing "entelligence," a suite of information management tools to help health care providers and manufacturers, says Cardinal CIO Kathy White.

These systems may be a sign of things to come. The WISDOM system has proved so successful that it has the potential to turn the IT service from a cost center into an income generator. By the end of this year, Stoller expects Owens & Minor to recoup its roughly $4 million invested in the system's creation. The company credited the system with generating $6 million worth of internal process improvements last year.

Roman Bukary, director of product marketing at Informatica, an e-business analytic solutions provider in Palo Alto, California, says that with WISDOM, "[Owens & Minor] has the ability ... to be a better partner to suppliers and customers."

Health manufacturers go online

Michael Mahoney recently became general manager of the Global Healthcare Exchange, an electronic marketplace formed in March by five of the largest health care and pharmaceutical manufacturers. Senior Editor Susan E. Fisher asked him how the manufacturers will run this major Internet marketplace.

InfoWorld: What do you consider your exchange's value proposition?

Mahoney: Our value proposition is working with customers who we already know, [based] on the companies that make up the exchange, and really helping them to drive out inefficiencies in the supply chain, reducing cost and giving them better access to information.

InfoWorld: Could you be specific about what the exchange will give customers?

Mahoney: The exchange could be personalized for them, based on the profile of type of information that they would like to see. It will allow for catalog-keeping abilities. It'll offer some searching capabilities. It will help to ensure that customers are getting accurate contract pricing. It'll have ... a searching capability through the requisition and order phase as well as the fulfillment. Our goal in what our customers want is the ability to have one site that they can really purchase throughout the entire health care vertical.

We are signing up manufacturers almost at the rate of one to two a week at this point, and our goal is to cover 80 percent of the SKUs available to customers by the launch date [of] September.

InfoWorld: How will the exchange deal with pricing?

Mahoney: We're facilitating here, so whatever customers would be purchasing typically from manufacturers, we're facilitating that transaction. The Exchange is not intermediating in any way in terms of pricing. It's facilitating the contract pricing that already exists.

InfoWorld: Why did the participating manufacturers decide to form their own exchange, rather than integrate their supply systems with existing marketplaces?

Mahoney: I think the easiest way to look at that is, the exchange is really just an extension of what a lot of these companies have been doing. The majority of them already have the capability for customers to buy through [their own] Web sites.

Really, what we've done is, [we've] created a common community ... [to] give our customers the ability to go to one place for this information.

InfoWorld: What are the partners contributing in terms of dollars?

Mahoney: Each company is committed to making the Exchange successful, and we've committed that one of our founding principles is this is a not-for-profit entity. Our goal is not to maximize profits in any way. The goal is to reduce inefficiencies in the supply chain and the founding companies and the partners that we bring on board are committed to that, but it's really not appropriate to talk about specific dollars.

InfoWorld: You've said that you're going to be using the resources of the GE Global Exchange Services, Ariba, I2, and IBM. What else can you tell us about the technology platform the exchange will use?

Mahoney: We are purely committed to having an open system. It's Web-based, and there won't be any proprietary integration that's required from either the manufacturers, GPOs, distributors, or from the customers.

InfoWorld: What role will the GPOs and distributors have in your Net marketplace?

Mahoney: We're open. We have every intention to work with the GPOs and distributors and to supplement their efforts.

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