Post-merger Global Healthcare Exchange seeks a balanced market

by Curt Werner

Mike Mahoney speaks with the confidence and conviction to a cause that trumps what must be an endless, numbing repetition of his company’s ends and means. As the young chief executive of Global Healthcare Exchange, Mahoney has somehow transcended the echo of corporatespeak and retained the zeal and appearance that fit so comfortably and excited so many other young executives during the e-commerce flash of the late 1990s, a roar that has since quieted to a whisper. That hard eventuality, accepted bitterly by some and with glee by others, was almost unthinkable when the notion of Web-based medical supply trading first hit the streets.

Mahoney’s cause is not always simple to articulate, particularly with scores of detractors nearly always circling overhead. This time, Mahoney’s task is to explain to a reporter why the Colorado-based company’s latest move was a good one, and even on conference call, he sounds up to the challenge. In a fluid, relaxed voice, he talks about the agreement announced in late December to acquire Medibuy, a medical supply e-commerce pioneer that like so many of its predecessors succumbed to the twin culprits of dwindling finances and an industry that has been relatively slow to adapt.

0303-ghx1.jpg (30939 bytes)“The deal for Medibuy comes down to three factors,” says Mahoney. “It gives us significant cost savings, drives adoption and builds our product offering. We are giving 100 percent of the benefits of the deal to hospitals, suppliers and to GPOs.”

Medibuy traces most of its financial roots to an early seed-money venture with Premier Inc. and later to similar deals with HCA and the HealthTrust Purchasing Group. In particular the original agreement with Premier drew controversy after the big GPO kicked in some $50 million just as the dot-coms were exploding in 1999. Affiliations with HCA and HealthTrust came later by virtue of pacts with EmpactHealth, a dot-com startup that sold out to Medibuy. Post-Medibuy merger, Premier has become a “strategic owner” of GHX, though it received no cash from the transaction, which was rumored to be valued in the $28 million to $30 million range, a figure Mahoney insists is high. For its investment, however, Mahoney says Premier gets “a big win” on the cost side. “It will now cost Premier less to work with us than on their ownership of Medibuy,” he says.

All venture capital money has been paid back, says Mahoney. “It makes sense for venture capitalists and others to be removed because they were not aligned with our guiding principles.”

Just as they had for competing e-commerce ventures seeking to crack the hospital market, things started slowly for GHX. For a variety of technical and financial reasons, the dot-coms were slow to measure up to their high expectations. But now, executives like Mahoney and Neoforma CEO Bob Zollars are convinced that the sector has finally gained traction. “More and more hospitals have adopted our model,” says Mahoney, “and we want to keep the profits from that model within the healthcare system.” While that may sound altruistic, GHX has repeatedly said it has no plans to either take the company public or even to make a profit. “We really only want to cover our costs,” he says.

It should be pointed out that GHX has as its prime financial support founding members bearing some deep-pocketed industry heavyweights: Abbott Laboratories, Medtronic, Baxter, Johnson & Johnson and GE Medical Systems. A slew of other big names have since joined in, giving GHX some impressive punch among its 17 strategic investors.

“We’re out to make the market fair for both providers and suppliers,” says Mahoney. “We have a board of directors that is balanced and a product and pricing committee that is split between hospital and suppliers.” He says that GHX operates on a $35 million cost structure generated by a combination of $20,000 per hospital integration fees plus an ongoing software maintenance fee depending on the GHX services a hospital uses, along with an annual fee paid by each participating supplier. He says GHX is open to any supplier for unlimited use. “Both small and large suppliers are treated equally,” says Mahoney. To date, about 80 suppliers have signed up with GHX, while Medibuy brings with it an additional 39. At the end of February, Mahoney says that the combined GHX-Medibuy site will have 1,250 hospitals live on its system.

For its integration fee and software maintenance fees, a participating GHX hospital can choose from a menu that includes reporting capabilities that allows users to recognize pricing discrepancies. The Medibuy deal, he says, adds REQ-S, another online reporting system that will be retained. 

0303-ghx2.jpg (30277 bytes)Mahoney brushes off criticism that the merger with Medibuy simply eliminates an e-commerce competitor that favored buyers over sellers. “We are just focusing on enhancing our value-added services,” he says. “We now offer things like synchronized items masters, catalog and supply numbers, as well as tools to facilitate the verification of pricing and eligibility.” In addition, he says Medibuy’s added numbers will actually serve to lower the cost of the system to everyone. “This,” he says in all sincerity, “is a ground-breaking event.”

Other critics have charged that the merger puts ownership of enormous chunks of valuable purchasing and pricing data into the hands of suppliers. Data nearly always gives a distinct advantage at the bargaining table to the side that has it. Mahoney waves off that allegation, too. “Hospitals can provide data to their GPO and data can be masked to preserve the identity of individual hospitals and is not aggregated,” he says. “Most hospitals want transactional data anyway across the hospital or across the IDN.”

Says Mahoney, “Putting this deal together was very easy and was geared to driving efficiency and creating balance.”

But as long as there is waste in the healthcare supply chain, those with technology, ideas and the funding will step forward to try and fix the leaks. Literally scores of outfits have tried and most have fallen far short of the mark before running out of cash. Those companies are gone, but the waste is still there. Study after study has confirmed that. 

The Medibuy merger with GHX leaves just two companies in operation. Neoforma is the other and its ties with Irving, TX-based supply giant Novation will likely keep it afloat and hopeful for the foreseeable future. Neoforma and GHX, although competitors, still have in place their so-called “Integrated Solution” that combines some of their offerings. Consolidation has pared the field, cut redundancy and possibly saved those two surviving outfits. The fact that nearly 2,000 hospitals have looked to e-commerce as a solution to their supply chain problems shows that there is probably room in the hospital supply industry for this answer. 

HPN

GHX Data Ownership Statement
  1. The parties to each transaction own the data relating to that transaction. The parties are the buyer (e.g., the hospital) and seller (e.g., the manufacturer). If a distributor is legally an agent, then its rights to data are governed by its agreement with the seller. If a distributor is legally the seller, then the manufacturer’s rights to data are governed by its agreement with the distributor.
  2. The exchange will not disclose transaction specific data to anyone without the consent of the buyer or seller.
  3. The Exchange may sell aggregated data. Aggregate data may not identify participants, individuals or particular transactions. Aggregate data will only include data from buyers and sellers who consent.
GHX Guiding Principles
  1. The strategic mission of GHX is to create an open and neutral supply chain utility for the global healthcare marketplace. GHX will be open to membership from all participants in the supply chain and will treat its participants with neutrality. The objective of the exchange is to reduce supply chain costs and to improve efficiencies for all its participants.
  2. The Exchange will focus on healthcare supply chain customers, especially on purchases in the following areas: medical/surgical, capital goods, pharmaceuticals, dietary needs and other services. A product council composed of an equal number of supplier and purchaser representatives will determine specific functionality that is consistent with the approved budget.
  3. The Exchange financial model is designed to reduce supply chain costs to its participants. The Exchange will implement pricing and business models designed to generate revenues sufficient to cover its operating and capital needs. Excess revenues beyond the anticipated operating and capital cash needs will be used to reduce the future pricing structure to all participants.
  4. As a supply chain utility for healthcare, the Exchange will seek to charge all participants fair value for the benefits received. The Exchange will not charge participants that are distributors duplicate fees for products manufactured by participants who are suppliers.
  5. The Exchange will not manufacture, package or distribute healthcare products.
  6. The Exchange will not intentionally influence the terms of any contracts (e.g., pricing incentives, auctions and promotions between users). The Exchange will use commercially reasonable efforts to present competing products in a neutral manner, except as otherwise requested by a purchaser. The Exchange will not intentionally influence the distribution channel of any product.
  7. The Exchange will implement appropriate security to ensure the confidentiality of pricing, product availability and purchase information between buyer and seller.
  8. The Exchange will not aggregate demand or otherwise become a group purchasing organization.
  9. The Exchange will follow data ownership guidelines as detailed in the “Data Ownership Statement.”
  10. The Exchange will work to promote the adoption of industry standards (e.g., UPN, HIN, UNSPSC, ECRI, etc.).

Source: Global Healthcare Exchange

March