E-commerce electrified group purchasing organizations this year by barely flipping a switch.
Although the purchasing groups not long ago considered the brazen dot-com upstarts as potentially lethal competitors, all parties are slowly coming to the realization that perhaps they can get along. Once the extended-and expensive-courtship is over, the partnership of GPOs and Internet-based electronic procurement companies may even prove to be a match made in heaven.
Purchasing groups are the cooperatives that marshal the collective buying power of their healthcare provider members to broker deep-discounted deals with suppliers and distributors. For their trouble, the purchasing groups are rewarded with marketing fees and rebates from the vendors, which they ultimately pass on to their membership. That may sound simple, but it isn't.
To take a snapshot of the evolving group purchasing industry, Modern Healthcare conducted its 12th annual Group Purchasing Survey.
This summer, 29 organizations responded to surveys seeking 1999 data; the surveys went to 70 groups engaged in purchasing. Last year, 30 groups responded to surveys seeking 1998 data; surveys went to 90 organizations.
Status quo year. By all appearances, the scenario is status quo: 1999 was another year of sizable, double-digit increases in purchasing volume. The top 10 respondents by volume of business reported a total of $39 billion in purchases for 1999, a 30% increase from the $30.1 billion reported the previous year. Two of those groups, however, didn't provide volume numbers for 1998.
For all groups reporting volume, total purchases were $40.5 billion in 1999, also a 30% increase from the previous year.
The groups, however, expect their big growth in volume to slow this year. The dollar value of goods and services sold for all responding GPOs is estimated to top $44 billion in 2000, a 9.4% increase over the previous year. The top 10 respondents likewise estimate $42.8 billion in purchases in 2000, a 9.3% increase over 1999.
Even though MODERN HEALTHCARE does not audit the results reported by the GPOs, the surveys do carry the authorizing signatures of the companies' chief executive officers or chief financial officers.
Illusory slowdown. The slowdown belies the frenzied activity on the sidelines this year with dot-coms and GPOs negotiating deals that are yet to come into focus on computer screens. The electronic procurement companies especially have been wheeling and dealing in a manner vaguely reminiscent of the merger mania that consumed group purchasing in the 1990s.
"We started the year (feeling threatened by the dot-coms) and then very rapidly moved into discussions of how many more dot-coms can there be," says John Burks, a senior vice president at Irving, Texas-based Novation, the joint supply company of VHA and University HealthSystem Consortium. "And there were literally hundreds of them with a new value proposition of the day. Then in midyear we saw deliberate approaches to partnerships-dot-coms and GPOs picking partners and forging alliances. And now we are seeing a market consolidation at an enormous rate of change."
For the first time, this year MODERN HEALTHCARE surveyed groups about their e-commerce activities. All but three of the 29 respondents reported that they're at least working on some kind of e-commerce solution. Nearly two-thirds-20 different groups-have at the minimum posted their catalogs online.
Twelve respondents said they now have the capabilities to process orders over the Internet, and all except one of those have done so.
Despite the elaborate windup, few have yet to release the ball: The percentage of purchasing volume conducted electronically over the Internet is negligible. United Iroquois Shared Services of Albany, N.Y., led the way, reporting that 10% of its $87.8 million in orders were placed through the Internet. Only four other groups reported any distinguishable level of Internet purchasing activity.
The e-story. Still, even without much to show for it, industry insiders agree the story of the year for the groups is e-commerce-just for what it promises.
Group purchasing is a dizzyingly complex business. According to an analysis by PricewaterhouseCoopers, the multitiered supply chain in this country encompasses 6,000 hospitals, 600,000 physicians, 20,000 medical product manufacturers, 450 national distributors, 10,000 regional distributors and another 25,000 suppliers that sell nonmedical products to the healthcare industry. That can generate a lot of requisition forms.
The inefficiencies are exacerbated by a pricing system described by Pricewaterhouse as "chaotic" and "Byzantine."
As an example, at San Diego-based Premier, the second-largest group purchasing organization by volume, the purchasing catalog consists of 20 thick binders-17 for medical/surgical products and three for pharmacy. That excludes capital items such as computers. The medical/surgical portfolio, which is updated twice monthly, includes 236,000 line items and 490 different vendors.
Try putting that online and plugging in all the disparate departments of hundreds of hospital members. Then throw in massive amounts of data crunching for good measure.
"That's a lot of electrons flowing all over the place," says David Ricker, chief operating officer for Broadlane, Mountain View, Calif.
In a sense Broadlane represents the kind of evolved organization that may result when a GPO breeds with an e-procurement company. Broadlane was formed last year by Tenet Healthcare Corp., Santa Barbara, Calif., and Mountain View-based Ventro, which specializes in creating business-to-business marketplaces. Tenet subsequently folded its group purchasing arm, BuyPower, into the newly created company.
Urgency to buy. The fact that many of the Web-based marketplaces are still under construction hasn't stopped some GPOs from buying in on spec. St. Louis-based AmeriNet, with 2,002 members the largest GPO by membership, has designated Broadlane as its e-commerce provider although the details of the business arrangement are still being worked out.
Why the urgency to partner? Healthcare purchasing is a system rife with inefficiencies. One widely cited study found that $11 billion is wasted annually on supply chain costs.
That understood, GPOs are cautiously convinced that their lives might be infinitely simpler with the one-click, paperless transactions promised by electronic marketplaces. Perhaps the biggest carrot is e-commerce's potential to collect, manage and spit out data in digestible morsels for information-starved purchasing departments.
"This is more about information than it is necessarily about procedures or transactions," says William Kennedy, vice president of corporate services for the New Jersey Hospital Association.
Not long ago, as an estimated 50 e-procurement companies proliferated and dazzled Wall Street, the GPOs worried whether e-commerce would add another superfluous layer to an already overcrowded supply chain. Even worse, the groups worried that the newcomers would usurp them-disintermediate them, they called it.
Those worries are being assuaged by some of the e-procurement companies themselves, which are salivating over the $150 billion worldwide market for medical supplies. A few are now openly admitting that they couldn't survive without the GPOs and their expertise in herding huge blocks of healthcare customers.
"We're a facilitator, not a disintermediator," said Robert Zollars, chairman, president and chief executive officer of Neoforma.com, San Jose, Calif., at a recent investor's conference hosted by Bear, Stearns & Co. in New York.
A publicly traded Internet business-to-business company, Neoforma in May signed a 10-year agreement with Irving, Texas-based Novation. With $13.1 billion in purchases in 1999, Novation represents the largest GPO by volume. Considering Novation's market share, Zollars noted at the same conference, he didn't mind one bit giving away 46% of Neoforma on the promise of 35% of the U.S. hospital purchasing business.
Tough sell. Each group is developing its own approach to lure cautious hospitals to the Internet. Convincing process-laden healthcare organizations that e-commerce is a good thing would be hard enough, but the majority of hospitals are working with purchasing systems that are as much as 20 years old, Burks of Novation says.
Novation and Neoforma have been aggressive in marketing e-commerce to hospitals and convincing them that Neoforma has the wherewithal to plug in their legacy systems. According to Zollars, Neoforma's "silver bullet" is an incentive program promising an equity stake in Neoforma to each of the 1,559 Novation hospitals that sign on and conduct business that way.
If electronic purchasing goals are met, VHA's 37% stake in Neoforma will rise to 44%, while UHC's 9% share will climb to 11%. For the time being, Novation also has agreed to subsidize the transaction fee that vendors will have to pay Neoforma, an incentive for suppliers to get wired.
With 119 of its 1,559 hospital members signed on last month, Novation well surpassed its goal of 75 hospitals before the end of the year. By the end of next year, the business plan calls for another 400 hospitals to be online.
News of the sign-ups apparently spurred a rise in Neoforma's share price. Along with many other dot-coms, Neoforma's share price has plummeted this year, to a low of $2.50 per share from a high of nearly $79. However, shares climbed to more than $6 with the announcement last month that the first year's goals were reached with four months to spare, notes Robert Chapel, vice president of finance for VHA.
Different strokes. Premier is taking a different tack toward e-commerce. Incentives are unnecessary when the value of e-commerce is so clear, says Herb Johnson, executive vice president for supply chain services. The country's second-largest GPO, which has committed $50 million to e-commerce, offers to pay for connecting its members, but hospitals must want it.
"E-commerce is the tool," Johnson says. "It's a choice that I'm not so sure (hospitals) can afford not to take advantage of in this marketplace."
Earlier this year Premier announced it was selling its in-house e-commerce business, Premier Health Exchange, to Medibuy.com, also based in San Diego. Four months later, Medibuy agreed to acquire empactHealth.com, the e-commerce solution launched late last year by HCA-The Healthcare Co. When the deals are completed and the dust settles, HCA will own a 16% share in Medibuy and Premier a 36% interest in the still privately held company.
Food service purchasing items are available online at Medibuy with nearly 70 Premier members ready to make purchases that way, Johnson says. From food services, the platform will expand into medical/surgical supplies, then pharmacy, then capital items.
One group that has barely made a ripple in the pool but acknowledges that e-commerce represents a tidal wave is Consorta Catholic Resource Partners, based in Rolling Meadows, Ill.
"We haven't made a big splash like Novation or Premier, but that doesn't mean we are just sitting on the sides," says Bruce Twomey, director of information technology.
Consorta is taking a conservative approach, committing a lot of time to evaluating all options, Twomey says. Along with Novation, Premier and their e-procurement partners, Consorta is part of a group that's attempting to standardize the Tower of Babel-like codes that plague the purchasing industry and threaten to derail e-commerce.
But Twomey says three curves have to be aligned before Consorta jumps into the fray-the hype curve, the awareness curve and the technology curve. When hype is down, awareness is high and technology is conquered, Consorta will make a decision, he says. For Consorta, one exclusive e-commerce partner may not be the answer, Twomey adds.
Symbiotic. The partnering of GPOs and e-procurement companies will lend a hand in the long-term survival of each, predicts Patrick Hojlo, a research analyst for Bank of America Securities, a New York investment banker.
"GPOs did a pretty good job of negotiating contracts, but not a great job," Hojlo says. "The only way of doing a great job is to bring more automation to what they do."
On the other side of the coin, companies such as Neoforma and Medibuy wouldn't have much business if they couldn't fold in the GPOs' ready-made customer base, Hojlo adds.
"It takes more than just a toll collector and a centralized source of information to be a successful business in an e-marketplace," he says.
One outstanding question looms over all the activity: Will provider organizations, especially hospitals, buy in to this new way of doing business? Many have their hands full with other priorities, Hojlo notes.
"The fact of the matter is a lot of hospitals are very confused about just what the Internet can do for them," Hojlo says.
Maureen Hofer, director of materials management at 386-bed Raritan Bay Medical Center, Perth Amboy, N.J., says e-commerce was the talk of a recent convention for materials managers that she attended in Tampa, Fla.
"Everybody wants to say they are in e-commerce, but no one is sure what it is, and everyone's version of it is different," Hofer says.
Raritan Bay got its first taste of e-commerce's potential when it started leasing special distribution cabinets from Omnicell, Palo Alto, Calif., Hofer says. The cabinets keep track of inventory via computerized counters. By keeping a tighter rein on inventory, the cabinets have allowed the hospital to close an off-premises warehouse that contained as much as $600,000 in inventory.
The Omnicell system is primarily in clinical areas of the hospital, however. Hoping to expand the cost-savings to all departments, Raritan Bay will beta-test an e-commerce platform-a Web site that will help control inventory-that Omnicell is putting together.
At nearby 270-bed Princeton (N.J.) Medical Center, director of material management Joe Cassidy believes the hospital is ahead of the curve. The independent-minded medical center, which belongs to several GPOs, is so far the only non-VHA or non-UHC member to sign up with Neoforma. Cassidy believes the hospital will ultimately avail itself of several different e-commerce platforms just as it does with groups.
For Cassidy, the distinct advantage of e-commerce will not be in processing costs.
"It will give me the ability to leverage dollar volume for proactive purchasing," he says. "I spend my time proactively going after contracts rather than placing orders, and using portals gets me further with much more data collection."
But no one can say for sure how it will all shake out a year from now- not even Yale-New Haven (Conn.) Health System, a member and supporter of VHA and Novation.
Patrick Luddy, corporate director for supply chain management at the three-hospital, 1,241-bed system, says he will think about e-commerce after installing a new computer system in December. Considering its ties with Novation, Neoforma will be the likely winner.
"We have to do our due diligence and investigate other opportunities out there," Luddy says. "The whole e-commerce question and solution, I think, are going to have a dramatic effect on the supply chain system across the country. It will bring all the members closer together-from manufacturers to end-users."