People and Opinions

Achieving the promise of eCommerce (Part I of II)
by Richard A. Perrin and Karen Conway

The technology to enable healthcare buyers and suppliers to conduct business electronically has been evolving for nearly forty decades, but always toward the same goal: lower costs and improved efficiencies through error reduction and process automation. More recently, the vision has expanded to include improved patient outcomes and financial performance by more closely aligning clinical care and accounting systems with more efficient materials management processes.

For many hospitals, purchasing and related accounting activities remain highly manual, error-prone processes. At the same time, other organizations have successfully streamlined their supply chains and are beginning to use the knowledge gained to make better purchasing decisions from both a clinical and financial perspective. With the majority of hospitals in the United States now engaging in some form of eCommerce, this two-part article looks at what’s worked, what hasn’t, and provides some guidelines for maximizing the value of your initiatives.

The eCommerce value proposition
The focus of eCommerce initiatives in healthcare has been on improving supply chain efficiencies, but the potential benefits extend well beyond more efficient transactions. In 1996, the Efficient Consumer Healthcare Response (EHCR) Initiative identified potential savings of $11 billion in the medical-surgical products supply chain alone through adoption of automatic identification, eCommerce, and electronic data interchange (EDI) technologies. Approximately, 15 percent of those potential savings were attributed to more efficient transactions, with the balance from the resulting access to better data to improve product choices.1

Hospitals that currently conduct the majority of their purchasing electronically commonly report the following benefits:

•Faster order processing time and product delivery
•Faster and more proactive supplier order acknowledgement
•Reduced purchase order errors
•Fewer invoice exceptions
•Increased staff productivity in both purchasing and accounts payable
•Better product sourcing and enhanced product standardization
•Enhanced purchasing visibility and improved contract compliance

One of the most important benefits of Internet-based eCommerce is the ability to aggregate purchasing information, even across organizations with disparate technology. Hospitals can’t expect to control supply costs until they know what they are. More importantly, understanding what was purchased and received, for how much, and how those products were used provides information essential to determining actual procedure costs, analyzing patterns of use, and making future product choices that support both clinical and fiscal objectives.

Garren Hagemeier, executive director of the Healthcare eBusiness Collaborative (HCEC), put it more simply: "Do the gauze pads that cost $6 provide better outcomes than those that cost $3? If not, why buy them?"2 As a greater percentage of purchasing is handled electronically, more comprehensive and valuable data is available to the purchasing organization; further, as clerical workload is reduced through process automation, personnel can be redirected to enhance customer support and to analyze the data for better product sourcing.

Cap Gemini Ernst & Young in a December 2004 document outlined a new business model for what it called "The Clinical Commerce Exchange" that "enables economic improvement by coupling clinical information and decision support with efficient commercial exchange transactions."2

This model assumes hospitals have already achieved transactional efficiency and begun capturing comprehensive purchasing data. Those organizations that have documented value in these areas have not only linked eCommerce functionality with materials management systems, but have also improved business processes. They understand that supply chain optimization is more of an evolution, than a revolution, requiring certain progressive steps to be taken along the way.

Steps to reaching value
Step One: Maximize the amount of purchasing that can be handled electronically using standardized protocols.

A fundamental advantage of the Internet-based exchange model is the ability for both hospitals and their vendors to establish one connection through which they can reach multiple trading partners. Without an exchange, hospitals interested in conducting business electronically with vendors have to establish and maintain separate EDI connections with each of their vendors, at costs ranging from $5,000 to $30,000 each. According to studies conducted by Global Healthcare Exchange(GHX), hospitals can avoid more than $100,000 in IT costs for every 15 suppliers they can connect with through an exchange rather than establishing their own connections.

Hospitals can also establish trading partner connectivity with individual vendors faster using an exchange. Cape Fear Valley Health System in North Carolina spent several weeks establishing EDI connectivity to a vendor on its own; working with GHX, disbursement manager Donna Fahy said it takes an hour or less.

Transacting via an Internet-based exchange is also more reliable than traditional dial-up connections. Ed Friese, director of materials systems for Chicago-based Resurrection Health Care, said GHX’s on-site server provides more reliable connectivity than dial-up via modem, improved order monitoring, and secure and confidential (HIPAA compliant) data transfer back to the MMIS, while minimizing much of the work that the hospital MMIS previously had to handle, as well as confirming that orders are received in time.

While hospitals often work with thousands of vendors, generally just a small percentage of those suppliers account for the majority of their purchasing. For example, Centura Health, a 12-hospital system lists 2,500 suppliers but conducts most of its business with 200. Hospitals can reach many of those vendors via an online exchange. The more hospitals and vendors participating in a single trading exchange, the greater the opportunity for all involved. The 140 supplier divisions currently connected to GHX represent approximately 90 percent of the medical-surgical products regularly purchased by hospitals.

Once connected to an exchange, hospitals should seek to establish trading partner connectivity first with their primary vendors. Once connectivity with major suppliers is achieved, hospitals can begin seeking trading capabilities with smaller, niche suppliers that often do not have a sophisticated EDI infrastructure. These suppliers can utilize Web-browser based tools instead. GHX recently introduced a new product that provides these smaller, niche suppliers with the ability to receive and send purchase orders and acknowledgements as well as processing electronic invoices. Brad Elmore, vice president of sales for water and air filtration supplier MedFilters said, "The invoicing capability really levels the playing field and makes it easer for smaller suppliers to compete with more technologically sophisticated companies."

While hospitals and vendors can use a trading exchange to do business with multiple trading partners through a single Internet connection, a registration process is still necessary to establish specific buyer-seller trading capabilities and ensure accuracy in how data and what data is communicated. One of the true benefits of the growth of the exchanges is the use of standardized communication protocols for the myriad details that must be accurately communicated as part of the ordering process. The exchanges ensure that all of the trading partners communicate transactions with all of the essential elements, eliminating confusion and rework of orders, pricing, units of measure, etc.

Step Two: Ensure quality of transactions by improving data accuracy

Just establishing connectivity does not guarantee improved efficiencies in the healthcare supply chain. One of the most critical problems is the lack of data synchronization between buyers and sellers and other supply chain business partners, such as group purchasing organizations. Without accurate data, electronic commerce can actually exacerbate supply chain problems by passing inaccurate data faster and increasing the number of mistakes that must be corrected manually after the fact. Consider the magnitude of the problem and associated costs:

•As much as 35 percent of procurement transactions result in errors that require rework.3
•70 to 80 percent of all product transaction errors are directly related to inaccurate product information4
•Supply management personnel at hospital and distributor sites spend a significant amount of time correcting non-conformance errors (concepts in Healthcare)
•Typically 20-40 percent of invoices have discrepancies and as much as 40 percent of an AP clerk’s time is spent reconciling invoices. (GHX studies)
•Average cost (shared by hospitals and suppliers) to research and correct a single order reconciliation exception ranges from $15 to $50 (Healthcare Distribution Management Association)
•A manufacturer must manually process orders with inaccurate product data, at a cost 7 times higher than an electronic order. (McKinsey & Co.)

Figure 1-eCommerce PO Processing

To avoid these problems, hospitals and health systems are strongly encouraged to conduct a thorough cleansing of their item masters, deleting duplicate and obsolete items and making necessary corrections to match their product data with that held by the manufacturers, before launching eCommerce initiatives.

The key is having access to a reliable source of "truth" for accurate product data, which ultimately comes from the manufacturers. Through the efforts of organizations like the Coalition for Healthcare eStandards (CheS - www.chestandards.org) and Healthcare eBusiness Collaborative (HCEC – http://www.hedic.org), the healthcare industry is recognizing the value other industries, such as retail and electronics, have achieved through creation of central repositories for accurate product information. Healthcare manufacturers currently maintain and verify product data in the AllSource content repository, which contains information on more than 2 million items. Use of such a repository in the retail industry has reduced PO error rates from 11 to less than 2 percent, according to HCEC.4

GHX has found an average 35 percent rate of inconsistency between hospital data and manufacturer data during the process of helping hospitals "get ready" to use eCommerce by automating the process of comparing and correcting data in their item masters to the AllSource repository. During transaction processing, GHX continues to monitor purchase orders using the data in AllSource – along with business rules established between specific trading partners – to identify and correct inaccuracies in purchase orders, and then notify buyers of updates that need to be made to their item masters. Hospitals can be notified when the price on a PO, POA and/or invoice does not match the most current contract price. New contracting tools further enable hospitals to maintain accurate contract pricing by reviewing and selecting new contract data to be uploaded in an automated manner to their materials management systems as it becomes available.

An added benefit of data cleansing and synchronization is a more manageable item master, according to BJC HealthCare’s vice president of material services, Nancy LeMaster. By eliminating obsolete and duplicate items, BJC HealthCare reduced the size of the database from 75,000 to 45,000 items. LeMaster also indicated that there are virtually no product data errors on purchase orders going through GHX.

Many hospitals make the mistake of assuming data cleansing is a one-time fix. Instead, hospitals need to employ on-going process improvements and systems to continually maintain the accuracy of their data. Too often, hospitals simply take purchase order history data and compare it to data provided by a cleansing service provider. The value of this process is limited not only by the accuracy of the provider’s data but also by the lack of complete or valid purchase order history.

The key is to build quality into the process from the start, rather than try to fix problems after the fact. Without system integration and standardized purchasing processes across organizations, many purchases are not adequately documented or captured. Given the number of new products continually introduced and retired from the market, as well as considerable merger and acquisition activity on both the supplier and provider side, even the most accurate data will change over time, sometimes overnight.  

Adoption of industry standards such as universal product numbers (UPNs) to uniquely identify products across the entire supply chain are of growing importance for their role in ensuring data accuracy. After nearly two decades of talking about the need for such standards, progress is finally being made. Bill Francis, vice president, contract administration for HCA, said "Healthcare is finally well-positioned to make real progress because we now have participants across the entire supply chain all using the same electronic trading exchange and source for accurate product data." Francis adds that more manufacturers are assigning UPNs to their products, as more hospitals are upgrading their systems to hold the numbers. Both HCA and Intermountain Health Care have upgraded their systems to hold the data, and BJC HealthCare is already transacting business with Guidant and Boston Scientific Corporation via GHX using UPNs.

Step Three: Automate as much of the procurement process as possible.

Fully automating the procurement process requires more than just the ability to send and receive POs and POAs. This includes transactions generated at the point-of-requisition to purchase order generation, receiving and invoice processing for payment.

In a manual environment, considerable time is spent on materials management-related functions before and after the actual order is sent. For example, clinical staff must find the right product, prepare the paper requisition, seek necessary approvals, and follow-up on order status. Purchasing staff, in turn, must convert the paper requisition into a purchase order to be sent to vendors and after receipt of the goods, Accounts Payable clerks spend time re-keying paper invoices reconciling invoice to PO to receipt matches. All of these steps contribute to data entry errors. A detailed list of the steps typically included in a manual processing system is as follows:

•Paper requisition created
•Requisition forwarded for review and approval
•Approved requisition sent to Purchasing
•Requisition keyed to MMIS/ERP to create PO
•PO sent to vendor via phone or fax •PO sent to vendor via phone or fax
•Vendor contacts buyer to confirm PO or vice versa
•PO confirmation called or faxed to buyer
•Buyer checks order status by phone •Product received - data keyed to MMIS/ERP
•Paper invoice received & keyed into MMIS/ERP
•Accounts Payable (AP) manually matches PO, Receipt, Invoice
•AP, Purchasing & Vendor discuss issues to reconcile invoice exceptions •Paper check sent to vendor for approved invoices

Fortunately, there is no shortage of technological tools in the marketplace designed to automate these aspects of the procurement process and improve workflow. In a fully implemented eCommerce solution, the above steps are reduced as illustrated in the following graphic (see Figure 1 – eCommerce PO Processing).

"The reason so many hospitals fail to realize the value they anticipated from these tools is because they try to force feed old business practices on top of new technology, rather than redesigning how work is done to optimize what the new tools have to offer," said Gina Besenhofer, corporate director, materials management, for Chicago-based Alexian Brothers Health System. It’s also much harder to do, said Besenhofer, because it involves changing how employees perform their jobs. 

Alexian Brothers recently centralized purchasing for its two acute care hospitals, rehabilitation hospital, behavioral health hospital and ancillary care facilities. Buyers, who are now called "contract specialists," are each responsible for specific service lines across the system. "They need to understand what the product options are, from both a clinical and contracting perspective, and make recommendations," said Besenhofer. "Change is always difficult and requires training, especially for employees who have been doing their work ‘the old way’ for many years."

Further efficiencies can be achieved through linkages between internal point-of-care dispensing systems, materials management, GHX and primary vendors. At Alexian Brothers, when a nurse takes a product from one of its Pyxis Supply Stations, the inventory is automatically decremented, creating a requisition to the MMIS system, which generates a purchase order to replace that product and sends it through GHX to the primary vendor. Once the order is filled, the product is delivered to the receiving dock and taken directly to the Supply Station. Meanwhile, Alexian Brothers and its primary vendors can capture data to facilitate better demand forecasting and management.

Change can also be good. When buyer Patti Colyer joined Cape Fear Valley Health System 10 years ago, she said she bought whatever the clinicians wanted, with little attention paid to the price. Now, with less clerical workload, she can spend more time working with clinicians to find the best product for patient care at the best price. "When you know what you are buying and why, you can do your job better and with more satisfaction," said another Cape Fear Valley buyer, Jessica Hinson.

Meanwhile, generating a fully touch-less order requires greater collaboration and coordination among trading partners. Hospitals and vendors participating in GHX have joined together to build consensus on standardized electronic communication protocols. EDI formats – evolving since the late 1970s – and the more recent development of extensible mark-up language (XML) provide a solid foundation for the lingua franca of Internet based eCommerce communication. The challenge, however, is that, while various standards for each format have been well defined, there is no single standard used by the entire healthcare supply chain. By identifying and reaching consensus on which standards best facilitate process automation, hospitals and their vendors can jointly achieve greater supply chain efficiencies. 

For an historical perspective on eCommerce and tips on getting started, see part II of this article in the July 2005 issue of Healthcare Purchasing News. HPN

References:

1. Efficient Healthcare Consumer Response (EHCR) Assessment Study. Online. June 2000.

2. e-Commerce Healthcare Supply Chain: The Clinical Commerce Exchange™ Model. Cap Gemini Ernst & Young U.S. LLC. David Mish and Richard Phillips. December 2004.

3. The Value of eCommerce in the Healthcare Supply Chain. Andersen. June 2001. p. 42

4. Health Care Product Data Synchronization Business Case. Health Care eBusiness Collaborative. Online. June 2002.

5. Delivering the Goods. Healthcare Informatics. Charlene Marietti. August 1999. p. 43.

About the authors:
Richard A. Perrin is President of AdvanTech, Inc. and Chair of the HIMSS Supply Chain Management SIG. He can be reached at 888-266-2841 or by email at raperrin@advantech-inc.com.

Karen Conway, Senior Manager, Strategic Communications/Public Relations for Global Healthcare Exchange (GHX). She can be reached at 719-488-0359 or 720-887-7215 (voice mail) or by email at kconway@GHX.com.

April
2005