Health Care Marketplaces: Will They Deliver?

by Susan E. Fisher

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online catalogs, electronic auctions to buy and sell excess inventory and used equipment, specials for promotional or out-of-date goods, and sites to submit RFPs (requests for proposals) for equipment and supplies.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, Calif., says that as much as $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, Mass., 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.newhealthexchange.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, Ill., 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, N.J.

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.