As small buyers of medical, surgical and office supplies, physician practices have difficulty getting goods at a decent price. To capture even a small discount, an office practice has to purchase supplies in large quantity and stockpile consumables until physicians can use them, then suffer the loss when out-of-date leftovers are discarded.
With the exception of those few who have access to a hospital-based purchasing group, doctors have to bite the bullet and pay retail prices at local outlets when they need to rush out and replenish their stores.
Internet-connected physicians are finding a new way--they're buying injectables, pharmaceuticals, DME, and office products and services such as discounted long-distance phone service--through online procurement companies.
Physicians order products from multiple vendors at the same time on one purchase order, and they get supplies delivered the next day. Best of all, physicians save money.
Heritage Medical Group Southwest has been buying supplies online for more than a year from Everything4MDs, which negotiates discounts with suppliers. The 160-physician IPA with 34 sites in the Dallas-Fort Worth area is saving between 30% and 40% on injectables, says Berna Mayer, corporate director of clinical services.
"Each physician orders from the same suppliers on the Everything4MDs Web site, so every order builds upon the next and the next, and the bill at the end of the month is less," she says. "Each physician in the group orders products in the amounts they need, and they come the next day."
Of all the activities associated with healthcare on the Internet, electronic supply chain management has the best business case behind it, says Peter Kilbridge, M.D., practice director with First Consulting in Boston. "Competitive shopping online is a no-brainer in terms of cost savings to a healthcare organization, and it's far less time-consuming and more efficient than the traditional, paper-based way of purchasing supplies using a fax and telephone," Kilbridge says.
Online shopping transforms independent physicians' offices from small buying groups into large cooperatives that leverage their collective muscle to take advantage of volume buying, says Wayne Magee, director of sales for the Millennium Research Group, a medical marketing research firm in Toronto.
"Physician groups are highly fragmented small businesses that have no group purchasing power," says Alan Capsuto, senior vice president of physician business for San Jose, Calif.-based Neoforma, one of the giants of the emerging industry. "What electronic procurement companies can do is aggregate physicians and then say to the Johnson & Johnsons of the world: 'We now have the equivalent of a buying group. What type of discount can (you) pass on to the people in this group?"'
Online procurement companies are targeting the 10% to 30% of the physicians' office budget that is devoted to supplies. And they are projecting wide ranges in savings--from as little as 5% on some items to as much as 70% on others.
Figures are based on informal surveys of physician customers, but the potential is there.
The companies make money by taking a cut of the savings in the deals they set up.
"Savings occur in a couple of ways. One is the discount you get, but another important saving comes from the ability to automate the purchasing process that consumes a lot of time and energy," Kilbridge notes.
That's why the e-procurement market is expected to mushroom in the next few years. In the hospital market alone, e-procurement will rise from its present level of 1% to command 64% of the medical supply and device market by 2003, according to an MRG survey of hospital procurement managers. MRG predicts that online procurement of medical products will increase by more than 200% every year and top $27 billion by 2004.
The current crop of online procurement companies for physicians' offices includes offshoots of huge hospital purchasing consortia, such as VHA and Premier. The two largest companies in this group are VHA's partner Neoforma and Medibuy, which is 45% owned by Premier. Premier's 1,800 hospitals spend more than $12 billion every year on supplies, drugs and equipment. VHA's purchasing subsidiary, Novation, has entered into a 10-year marketing deal with Neoforma.
Novation has ties to as many as 6,500 healthcare facilities and spends about $14 billion a year on supplies.
Neoforma has negotiated prices with more than 60 suppliers across the spectrum of healthcare buying. With its purchase of the physician online procurement link EquipMD, in May, Neoforma allows physicians to benefit from these lower prices, Capsuto says.
Neoforma operates in 47 states and serves medical groups with an average of 4.5 physicians.
Neoforma has other offerings, such as long distance service for 6 cents a call.
San Diego-based Medibuy keeps adding to its portion of the market. In July the company took over Premier's Health Exchange buying arm and bought HCA's EmpactHealth operation. The company also is strategically partnering with Atlanta-based WebMD Corp. and soon will be launching a supply service geared specifically for the physician marketplace.
Suppliers also are beginning to carve out some online procurement territory by forming their own sellers' groups. Global Healthcare Exchange includes some of the biggest medical suppliers--Abbott, Baxter, GE Medical Systems and Johnson & Johnson. "This group of manufacturers got together to post a Web site so procurement officers could order all their supplies from one location online," Magee explains.
Global Healthcare Exchange still has some logistical problems and cost efficiencies to iron out, says Magee.
Healthcare Exchange, on the other hand, is an online wholesaler and distributor that is using existing distribution channels. "These big guns say they are not trying to make money through an Internet play. They are trying to improve customer service and give customers and themselves a way to get around the fees that e-health purchasing groups, the Neoformas and Medibuys, charge suppliers to participate. So suppliers are doing battle with the purchasers' side, and how that is going to play out, nobody knows," Kilbridge says.
Occupying the third segment of the physician services arena are independent companies that are scrambling to distinguish themselves from one another and attract large physician groups.
Everything4MDs acts as a personal shopper for a physician group by negotiating prices with a small number of vendors. "We select one vendor for a particular product based on cost and quality. By narrowing down the number of vendors, we get better prices," says CEO Richard Merkin, M.D.
Everything4MDs is adding additional services, such as online claims processing and credentialing as well as a module for home health that orders, delivers and tracks equipment, pharmaceuticals and supplies delivered to patients' homes.
Although Merkin declined to disclose how many physician groups were on board, he said the company was serving IPAs, radiology groups and small hospitals.
Irvine, Calif.-based Embion takes physicians' existing contracts with suppliers, loads them into a data warehouse and centralizes the buying process, says Darrilyn Adams, executive vice president for acute care.
"A multilocational practice tends to have one person who manages four or five offices," Adams says. "We set up our system so that person can allow procurement at each independent site but also oversee purchasing from a central location.
They can build in authorization protocols based on dollar minimums or product lines, lock out unauthorized individuals from ordering certain classes of medications, ensure that their contracts are being adhered to or their budgets are not being exceeded."
Embion is attracting so much business it's running 60 to 90 days behind on requests to get practices online, Adams says. It recently expanded its negotiating clout by signing a letter of intent with Medical Pathways, an IPA risk management company that includes 300 medical groups in western states.
The physician online procurement market nevertheless is volatile. Johnson City, Tenn.-based Medicalbuyer already has closed its online shop, and Neoforma's Capsuto expects that two to six more operations will close down by the end of the year.
"The financial markets are not very friendly right now. Anyone who did not get financing before the markets became unfavorable, anyone who has not been acquired or done an IPO, is in jeopardy," he says.
Like any emerging industry, online procurement will undergo consolidation until there are a handful of healthy companies going after the physician market.
"With so many major market groups vying for the attention of procurement offices, it will be a run for the roses," Magee says.