E-Commerce Poised to Impact Healthcare Supply Industry Significantly

More than any single product development or reimbursement issue has altered the industry in the past, electronic commerce stands ready to change the medical device and supply industry, probably forever. The changes, when they come, are certain to alter the way medical products are marketed, sold and moved.

Several companies are lining up to cash in on what looks like the purest form of healthcare e-business. Suppliers are putting their catalogs online. And this move is accelerating despite the fact that only a relatively low percentage of hospitals and systems actually order medical supplies through their computers now.

That will soon change, however, and when it does, the effects will rattle every link in the supply chain from sales reps to distributors to group purchasing organizations.

Probably one of the most visionary, and by far the best financed, of the medical product e-commerce companies is Neoforma (Santa Clara, California). The actual neoforma.com Web site was launched only last October. But the ideas that drive it come from co-founder Jeff Kleck, a PhD with a background in academic medicine and clinical experience as well as time spent at Varian Associates (Palo Alto, California).

Kleck says three drivers push healthcare e-commerce. The first is the most obvious: cost savings. Providers are serious about driving costs out of the supply chain, he says, and have succeeded to a degree by (1) becoming more efficient and (2) negotiating stronger contracts. "Weve seen increased use of EDI between primary suppliers and providers," says Kleck. "Weve seen GPO contracts. Weve seen inventory changes such as just-in-time, outsourced inventory and stockless operations. Supply chain costs for high-volume supply items have been dramatically reduced. Its time now to look at purchases of equipment and reusable medical products."

Access to information is a second driver. "Providers have traditionally received information on products from sales reps, from out-of-date catalogs and by word of mouth. E-commerce offers a new source of information; potentially, this information can be up-to-date and unbiased."

The third driver, says Kleck, is efficiency. "Providers have a mission to provide services to those in need," he says. "Anything that they can do to minimize the overhead portion of that job leads to greater personal satisfaction by allowing them to deliver a higher quality of care to their patients. If an OR nurse spends hours or days researching equipment that a doctor has requested, it is a waste of a scarce resource. The Internet can provide a way for that nurse to quickly perform the research and make the appropriate recommendation."

In that vein, Kleck says he realized the planning process was difficult and tedious mostly because the understanding about the equipment, financing, price, and other relevant issues was usually spread among many people who sat on endless committee meetings that took as long as six months to decide which MRI to buy, for example. His work with Neoforma, he says, crams that costly six-month experience into just one or two sessions on a computer.

Neoforma.com, a sophisticated extranet in the current lineup of healthcare product acquisition Web sites, displays a number of "virtual hospital rooms" onscreen. The Web site aggregates and assimilates information, creates an entire warehouse of vendors, and connects them to the user through a familiar communications tool, the computer. The service is free to both listing vendors and to registered users. For the time being, <neoforma.com> only offers equipment planning applications, including best practices material. But plans call for rolling out a transaction-based medical supplies section by mid-1999.

Another healthcare site with a slot in e-commerce is <mrn.com> (Castle Rock, Colorado). The company, founded in 1994 as Medi Resource Network by Eric Swenson, works in a manner similar to <neoforma.com>. That is, pre-screened vendors place their products on the site and pay a percentage to mrn.com for sold product only. There is no charge to list products at the site, and the seller has complete control over inventory and pricing.

The company began with the vast majority of product sold by refurbished medical equipment dealers, and many signed up quickly. A small, but growing, number of physician offices and clinics also sell used equipment at the site.

Swenson says he works on building long-term relationships with manufacturers. "The dealers that sell product through us are excited every time they get a sale on our network," he says. "It doesnt cost them anything to get their leads or their sales."

Swenson describes mrn.com as a "virtual sales support network," adding that his site enhances a manufacturers product lines. He contends that e-commerce through mrn.com lowers the cost per sale. "If we can decrease the time it takes and the number of appointments that have to be made to make a sale by connecting the buyer with the seller, then its cost-efficient for everyone."

Clearly, e-commerce has its limitations in its early stages. "Theres plenty of ground work to be done before e-commerce can work effectively for IDNs in their dealings with suppliers," says Manny Losada, who heads the hospital division for med/surg distributor Caligor (Pelham Manor, New York). Losada argues that most IDNs are still in an integration phase, which precludes them from taking full advantage of the benefits of e-commerce.

Political issues must first be settled within merging institutions, he says, which will help settle turf wars. Once those matters are resolved, standardization issues can be tackled.

IDNs constantly face tricky issues surrounding central procurement that often lead to even more turf battles. Then, theres the important behind-the-scenes matter of centralizing information systems and platforms. "At this point in the integration process," Losada says, "no one is out of the forest in the area of implementation. Its complicated enough in a single, thousand-bed facility, no less in a system that has four such hospitals."

For distributors, there is little doubt that the benefits of e-commerce can make a difference in profit margin, which makes a difference to shareholders. "There are definite economies if everyone works from a standardized concept," he says. "But right now, we and most others are still struggling with the UPN (universal product number) battle." The industry-wide application of UPNs is planned for July.

Not everyone is convinced that an Internet-based solution is a panacea. Ted Almon, president of regional med/surg distributor Claflin Co. (East Providence, Rhode Island), believes that EDI, not e-commerce, is more advantageous to the industry. "Weve gone pretty far down the road with EDI," says Almon. "I think that Internet-based commerce is a step backward from EDI. Its easier to order through the Web, but we can put more information out there using EDI. No one is going backward on the hospital side, but for high-volume, iterative transactions, the Web is cumbersome."

Some GPOs Have Already Boarded the Train

E-commerce can easily be perceived as a threat to GPOs, as would just about anything that gets in the way of a groups ability to facilitate sales. Ed Kuklenski, senior vice president for Child Health Corp. of America (Shawnee Mission, Kansas), a GPO for 37 childrens hospitals, concedes that e-commerce is "very much a threat" to GPOs. "Over time, we expect to see a huge emergence of e-commerce into hospitals, particularly in Internet-based activities like online auctions and electronic RFPs."

"GPOs will be challenged," he continues, "because GPOs are somewhat closed shops and in an open environment they can get left behind. It all depends on the perfection of technology that the market demands. If groups look at e-commerce as competition, they will lose the battle. But if they look at e-commerce as a tool that will be employed by their members, GPOs have a chance of growing with their members and with the new technology."

CHCA is taking a proactive view of the changing market by designating five of its hospitals as "focus sites" to move purchasing functions to the Internet. That program is still in its early stages, but could move forward with relative speed.

Joe Colonna, corporate vice president of the purchasing department of Shared Services Healthcare (Atlanta), a regional GPO serving mostly southern healthcare facilities, doesnt view e-commerce as a threat. "I definitely see a changing market," he says. "But I also see e-commerce as a huge opportunity for GPOs." He mentions online catalogs that contain GPO contract portfolios, where materials managers can simply click to view a product, their distributor and to place an order.

Colonna predicts that intranets will become the mode of choice for IDNs. An intranet-based system, available only to IDN facilities, will allow users to check catalogs containing only those items that appear on an IDNs product formulary. Orders would be placed using passcodes, allowing an IDN real control over what is ordered. Prices could be locked in, and for preference or "non-routine" items, the user would be instructed to contact materials management.

The more alarmist materials managers could take the dim view of todays rapidly advancing e-commerce technology and fear for their jobs. Can the new healthcare supply technology actually move materials managers out the door and replace them with laptop computers? Not likely. Instead, e-commerce seems to offer materials managers the opportunity to better themselves, make their performance more accurate and give them a chance to save their institutions even more money than before. In most cases, suppliers are ahead of this curve and are preparing to meet new demands made by e-commerce. Its likely that the more talented and the more flexible materials managers will reap the most dividends both personally and professionally from the coming e-commerce scenarios.