Auditors are putting the finishing touches on a six-month privately funded study that its sponsors hope will supplant the yellowed, dog-eared document that in 1996 identified $11 billion of waste in the healthcare supply chain.
At that point five years ago, buying medical supplies over the Internet wasn't even on the radar screen of most hospital administrators.
Group purchasing giant Novation, its e-commerce partner Neoforma.com and Andersen business consultants in Dallas have teamed up to produce the white paper, which they say should be ready for publication in June. A cost-accounting expert at Stanford University and a supply-chain-management expert at Harvard are validating the results.
The study comes at a crucial time when Neoforma is staking its life on achieving a critical mass of customers at all levels of the supply chain. To accomplish that, Novation has begun playing hardball with all would-be vendors, strong-arming them into making a commitment to Neoforma as a condition of doing business with Novation (See story, this page). Meanwhile, the GPO and its struggling electronic marketplace are trying to supply hesitant healthcare organizations-especially manufacturers-with a persuasive reason to play ball with them.
Not surprisingly, the study's tentative conclusions bode well for e-commerce, the sponsors claim. By eliminating costly errors, e-commerce can help hospitals pinch pennies. The auditors also somewhat surprisingly found that supplier representatives are wasting a lot of precious sales time troubleshooting blockages in the supply chain, the sponsors said.
The older study, which the new study's sponsors say is obsolete, was commissioned by Efficient Healthcare Consumer Response, a consortium of hospital companies, distributors, suppliers and trade associations. It took a macro view of the flabby, cumbersome process that moves two aspirin from the factory floor to a patient's hospital bedside.
This study, however, will take a micro view, the sponsors said. Indeed, the end product will be an interactive model where any hospital or supplier that is considering e-commerce for the next era in supply purchasing can plug in its own data to calculate the potential cost savings for them.
The sponsors obviously have something to sell, namely, [email protected], which is operated by Neoforma for Novation's 2,200 members under a 10-year contract. But rather than aiming to prove the value of e-commerce, the study merely aims to quantify the savings, said Daniel Eckert, president and chief operating officer of San Jose, Calif.-based Neoforma. The question it answers is, "What's in it for me?" he said.
John Burks, senior vice president of e-commerce and information services at Irving, Texas-based Novation, resists making comparisons between the new study and the EHCR study because so much has happened since the older study was released, he said.
Five years ago when the EHCR study claimed the healthcare industry could squeeze out 48% of its process costs-as much as $11 billion-it was advocating industry-wide adoption of some best practices and technologies. One such enabling technology was electronic data interchange. Now ubiquitous in most big hospitals, electronic data interchange will eventually give way to the Internet if Neoforma has anything to say about it.
Andersen's auditors were directed to examine each of the three supply chain tiers-providers, distributors and manufacturers-from the moment an item is ordered to the moment the invoice is eventually reconciled. The sponsors declined to disclose the cost of the study, which was commissioned by Novation and Neoforma.
The consultants looked at two examples of four models-providers, drug manufacturers, medical-surgical manufacturers and distributors. One example served as the control group, which received a thorough audit, and the other as the validation group, which confirmed the results.
Key tentative findings show that providers are conducting actually less than one-third of all their transactions electronically, Burks said. Although the vast majority may be ordering electronically, they fail to follow through when confirming orders, which creates nearly a 25% error rate.
Another key finding: Sales representatives are spending as much as one-third of their time on nonselling activities such as problem resolution, Burks said. That inefficiency should capture the interest of suppliers intent on gaining market share with the help of a focused sales force, he added.
The distributors and manufacturers that served as guinea pigs for the study have not given permission for their individual cases to be discussed. But Crozer-Keystone Health System, Springfield, Pa., volunteered as the control group for the provider model.
Crozer-Keystone, which operates four hospitals under two licenses, purchases about $60 million in supplies annually, said Stephen DiMambro, vice president of support services for the system. An early adopter of the Neoforma platform, Crozer-Keystone currently procures about 20% of those supplies, or $12 million worth, online, he added.
After conducting the audit of the purchasing system in place, the auditors estimated that e-commerce could yield a 1% to 4.5% savings for Crozer-Keystone, DiMambro said. But he guessed the savings would be closer to 1%, approximately $600,000 a year.
"That's a push," DiMambro said.