Will hospital web buying ramp up?

As market settles, dot-coms work to win buyers’ confidence
by John Hall

Back in the late 1990s , light years in Internet time, dot-coms promised to transform the healthcare purchasing landscape into a field of dreams, where hospitals would flock willingly into a world where all supply needs were just a click away, where paper-based purchase orders, confirmations and payments were distant memories, and huge barrels of cash savings were there just for the taking.

But very few hospitals came to play. Today, a half dozen years after a series of dot-com crashes, lost fortunes and unfulfilled promises, Internet-based e-procurement still clings to those original premises. Only this time, hospitals are vowing to play by their own rules.

Hospitals have been practicing one form of e-procurement or another since the fax machine and the modem made faster data interchange possible. But Internet-based e-procurement, even stripped of its still snazzy veneer and colorful interfaces, is still the biggest game in town.

In a 2002 report, HealthCast Tactics: A Blueprint for the Future, PriceWaterhouseCoopers notes that “The 50-plus vendors in e-procurement in 1999 have narrowed to a handful, providing hospitals more stable partners for supply chain solutions. Now, a shake-out has occurred and only a handful of e-supply chain companies remain, giving hospitals more confidence in their viability and cooperation.”

Indeed, there are fewer, yet mightier players today Global Healthcare Exchange (GHX), Neoforma and Broadlane being the most prominent. These so-called “intermediaries” have survived the storm, with a new resolve to win the hearts and minds of hospitals by doing what they failed to do before: listen to customers.

Still, there are many who believe that Internet-based e-procurement has yet to rebound.

Unmet expectations
When it first became possible to do business with suppliers over the Internet, an initial perception was that buyers would save money on the products themselves; later, it would become abundantly clear that the real potential savings were “soft” dollars found in internal efficiencies.

“Five years ago, people thought they would be saving tons of money by purchasing over the Internet. The real gains people are seeing today are to be found in productivity enhancement,” said Ken Peterson, vice president for logistics management, Aurora Healthcare, a large, Milwaukee-based hospital system.

“While many e-business start-ups saw a bonanza in bringing online supply management to healthcare, the promises of that trend have been largely unrealized, noted Price- WaterhouseCoopers in its 2002 report.

Indeed, those initial perceptions set up Web intermediaries for failure. “Early Web intermediaries had e-commerce visions that were profound to the buyer. The problem is they provided expectations first, and solutions second, instead of first providing solutions and then exceeding expectations,” said Robert Schuweiler, a long-time IDN materials executive who later spent several years as a supply chain architect for the GPO Premier Inc.

Schuweiler said he believes Internet procurement has fallen far short of its potential. “The marketplace simply wasn’t ready to accept or digest it,” he said. “Even today, the marketplace isn’t demanding the efficiencies it should demand.” Schuweiler blames this on the lack of “serious examples that attract the movement away from the efficiencies of an ERP system connected via EDI to key supply channel sources.”

Moreover, Schuweiler said, buyers and sellers weren’t ready to change the way they do business. Hospitals cringed about giving third parties access to their data and buying habits, which could leverage their interests with both known and unknown sellers. Vendors winced about making their margins vulnerable by entering a marketplace that would “commoditize” their high-end products.

An e-disaster
Jack Anderson, president of Material Resources Inc., a Raleigh, NC-based supply chain consulting firm, calls the early Internet-based procurement efforts “a disaster. Never has so much been spent for so many for so little return.” Anderson said the biggest failure of the early intermediaries was their profound lack of knowledge about how hospitals conduct business. “The dot-coms started out meeting the needs of everyone but their true customers,” he said. “For one thing, they developed a product that couldn’t communicate with a hospital’s legacy systems. This was not the vision of saving money and creating efficiencies.”

Even today, Anderson said he sees a paucity of innovation in materials management information systems, the “voice” on the hospital end of the Internet cable. “Time was when there were half a dozen software developers out there who were passionate about automating procurement at the hospital level,” he said. “They should have been taking the lead, but interest waned, and some of them aren’t even around now. Today, it’s mostly off-the-shelf stuff.”

Another disappointment: the dot-coms still don’t fully understand how hospitals do business, says Anderson. “The dot-coms spent untold dollars on slick marketing and exuded a lot of enthusiasm out of the gate, but had no idea what was going on inside the walls of their customers’ hospitals. They promised to replace hospital legacy systems instead of making them work with theirs. They talked about doing transactions with 400 vendors for mils on the dollar. Now that was extraordinary.”

Regardless of how proficient e-commerce pioneers were at the advent of the Internet, the healthcare industry was and always will be quirky. As with other industries, hundreds of dot-com solutions have come and gone in healthcare, introducing Internet technologies that will forever alter the business landscape. But unlike other industries, the healthcare industry has reacted differently to e-solutions for many reasons: Because it is highly regulated, healthcare is slow to change. And because it is a fragmented cottage industry, it is difficult to develop industry wide solutions. Plus, because healthcare is often a money loser, it often lacks capital for new technology investment.

Staggering projections muddle the issue
To what extent hospitals are participating in the Internet marketplace to buy medical products and supplies is a matter of great contention. Numbers provided by the Web intermediaries lead the casual observer to think that hospital Web buying is quite robust. Market analysts and consultants, however, are a bit more reserved.

Said Schuweiler, “The marketplace today isn’t really pushing Internet commerce like it was several years ago. Distributors and manufacturers don’t really have the incentive to shift into the Web space to do things that EDI offers today.” Moreover, he said, suppliers believe that the more complex the buying process is, the greater the dependency of the buyer on the seller. “Confusion also enables manipulation of the mix and consequent margin increases for the seller,” he added.

Bruce Merrifield, a Chapel Hill, NC-based distribution expert, said he has witnessed “very slow progress in I-procurement since the dot-com bust. Very little new business is being generated.” Steve Butler, a senior business analyst for eMarketer.com, a provider of Internet and e-business statistics, agrees. “B2B healthcare exchanges have told me that they’re having trouble recruiting new members, although current members are expanding their access or usage. They’re also saying they plan to begin more heavily promoting their benefits.”

Key market projections, meanwhile, indicate that healthcare suppliers have a huge stake in the Internet. San Jose, CA-based market researchers Frost & Sullivan estimate that the end of next year approximately 23 percent of total U.S. medical device revenues will come through Internet transactions. Moreover, the researchers say that total e-commerce revenues will make up 52 percent of manufacturers’ revenues in 2004.

Reviewing market studies over the past six tumultuous years only shows the difficulty of accurately projecting Web-based purchasing activity among hospitals and suppliers. For example, in 1999, Forrester Research predicted that online B2B e-commerce among hospitals and suppliers would reach $11 billion by 2001. Forrester projected that figure would mushroom to $26 billion in 2002, then almost triple to $60 billion this year and more than double again to $124 billion in 2004.

A year after that optimistic report was published, Millennium Research Group released a report (Online Opportunities in the Medical Products Marketplace) with more conservative projections: by 2004, online procurement of medical products would be expected to reach $27.3 billion, just one-fifth of Forrester’s projection made only a year earlier.

Millennium’s survey of hospital purchasing managers revealed that two-thirds of their transactions will be conducted online this year, and the firm predicted that online procurement of medical products would explode at annual rate of 200 percent after next year.

Three years after Forrester’s report, PriceWaterhouse Coopers released its voluminous study, declaring that less than 1 percent of all medical supplies were purchased online in 2001. “Yet, nearly one-third of hospitals have now signed on to one of the three large e-supply chain vendors, showing that hospitals are quickly positioning to integrate their systems with those of the Internet vendors.” The report projected that more than 20 percent of all medical products would be purchased online this year. 

Access vs. use
Based on what the largest intermediaries are reporting, a different picture emerges about hospitals’ use of the Internet to purchase medical supplies and equipment. San Francisco-based Broadlane, for instance, reports that since April 2001, its Web procurement portal BroadLink has processed more than $1.3 billion in customer orders, and $2 billion in purchase order volume is expected to flow through the exchange in 2003. Forty-four suppliers have signed up to implement BroadLink, and 22 are fully integrated. On the provider side, 311 hospitals have integrated BroadLink, and 281 are processing orders.

San Jose, CA-based Neoforma, which could not be reached for comment, reports on its public website that at the end of 2002, it had built a “critical mass” of 929 hospital and 287 supplier customers.

When Westminster, CO-based Global Healthcare Exchange merged with Medibuy in December, it boasted of creating the largest single exchange in healthcare. GHX, which also could not be reached for comment, states on its public website that more than 1,300 facilities will have the opportunity to transact business electronically with over 100 supplier trading partners.

Meanwhile, GHX and Neoforma formed a “strategic alliance” in August 2001 as a “comprehensive and integrated e-commerce solution for participating providers and suppliers.” Manufacturers, who needed a more efficient and less expensive way of reaching hospital members of both Neoforma and GHX, drove the partnership. Moreover, GHX maintains that a more robust end-to-end solution would help attract the critical mass of participants necessary to maximize value and facilitate the adoption of industry standards in the healthcare supply chain. “With both buyers and sellers sharing consistent and accurate data, suppliers benefit from cleaner orders and faster payments, while hospitals can avoid the reconciliation costs that result when there are discrepancies between purchase orders and invoices,” GHX said in a public statement.

According to GHX at press time, 84 hospitals and nine corporate suppliers were connected and conducting transactions through the two companies’ integrated exchanges, and that transaction volume has doubled every month since the first trading partner connections were established in December 2001.

‘Webulized’ EDI
For the short term, many observers believe that the bulk of hospital e-procurement will continue to be conducted via electronic data interchange. According to Giga Information Group in Cambridge, MA, healthcare EDI transaction volume continues to grow progressively, from $432 billion this year to a projected $527 billion in 2005.

For high volume, repetitive ordering, EDI is a technology with which hospitals feel comfortable, and vested. According to eMarketer senior analyst Colin Brink in a report on e-procurement, there are structural reasons that make buyers reluctant to abandon their legacy systems. “Obviously, [hospitals] are concerned with recouping earlier IT investments, and ensuring that new applications are interoperable with their existing infrastructure,” he said. “EDI is also safe, and it performs logistically simple, repetitive transactions such as drug purchases fairly well.”

EDI is even more entrenched with the supplier community. Said Schuweiler, “EDI continues to be the preferred transaction mode between distributors and manufacturers. EDI will always be around in one form or another. It’s in everyone’s interests and is a fairly efficient method.”

Still, EDI has inherent limitations. It’s a poor tool for managing the complexity of procurement, handling information flows, providing real-time information, and for man oday is awful,” said consultant Anderson. “It’s so complex for a hospital to have to create EDI maps with each and every vendor’s disparate information systems. It’s not uncommon for an EDI map to not work with a vendor’s different geographic areas. That’s where e-procurement on the Web holds a lot of promise. Most hospitals today use EDI with six or fewer vendors and have no plans to expand. Yet the potential is 
fabulous.”

EMarketer’s Brink said B2B companies are now demonstrating that the Internet can add a new dimension to EDI that even the most hardcore purchasing manager cannot overlook: its ability to provide one EDI pipeline to hundreds of suppliers. Merrifield describes the phenomenon as the “webulization” of EDI.

“I won’t gain any efficiencies from hard wiring myself to every vendor I do business with,” said Aurora Healthcare’s Peterson, whose system of 14 hospitals and 100 clinics funnel about $40 million in purchases a year over the Internet, mostly through the Cardinal Health website.

Using an Internet-based requisitioning tool, Aurora Healthcare sends purchase orders, receives confirmations, invoices, and processes payments using extensible markup language (XML), a relatively new format some say improves upon existing EDI because it interfaces more smoothly with Web-based applications. Aurora is part of a pilot project with Premier Inc. to fine tune an e-sourcing product to give members an enhanced product catalog, along with an online contract management capability that includes price activation and validation, product classifications, sales reconciliation and rosters.

In a very short period of time, use of the requisitioning tool at Aurora has exploded: from 200 system users to more than 2,000 today. Says Peterson, “When I push a button on my PC, the purchase order goes out the door. I get an XML document back from Cardinal that shows my confirmation. Then I get invoices in XML from Cardinal. We’ve also established a process that verifies the pricing out the door, upfront, instead of at the back end, when it’s harder to identify and fix.” As a result, pricing errors have been halved, he added.

The efficiencies realized using the system has allowed Peterson the efficient luxury of shifting people who were spending their day processing paper-based purchase orders to more important and significant contract management functions.

What lies ahead?
The extent to which Web-based e-procurement changes the face of healthcare purchasing is essentially a matter of economics: as long as the efficiencies it imparts on the supply chain outweigh the costs to play, it will continue to grow in popularity.

Schuweiler sees Web-based procurement as one of many means to an end, and not a magic bullet for fixing all that ails the supply chain. “E-procurement has worked well in other industries because all of the players lined up around mutual incentives,” he said. “But healthcare is a messy business of players seeking to protect their interests at the expense of the whole. And it has traditionally not favored singular channels. A successful e-procurement solution for healthcare has got to be a ‘both/and’ proposition, not an ‘either/or.’”

Merrifield envisions healthcare Web procurement as a powerful means of creating more educated buyers, not so much one that generates new business. And he says that the Web probably won’t lead to a global community of hospital buyers. “If people think all healthcare players will integrate their legacy systems with some gigantic Net-based entity and everyone will sit around singing ‘Coombaya,’” he said, “they’re living in a utopian world.” 

HPN

John Hall is a former senior editor of Healthcare Purchasing News who is now a Chicago-based freelance writer specializing in healthcare.

April