Novation has put all would-be suppliers on notice that if they aren't willing to do business with the budding albeit money-losing Internet marketplace operated by Neoforma.com, they can't do any business with Novation.
The giant group purchasing organization has been including the arm-twisting requirement in all requests for proposals that have gone out since October 2000. It marks a tougher approach for Irving, Texas-based Novation, which likes to think of itself as the "kinder, gentler" GPO, having traditionally promoted its purchasing contracts by offering incentives rather than penalties to its 2,200 members.
By setting up the terms for a potential deal-breaker, Novation clearly means to sway the major distributors and manufacturers that have resisted signing on with its Internet business, [email protected], or even invested in their own e-commerce ventures. Novation officials characterized their move not as a punitive measure but as a sound business strategy meant to jump-start an Internet venture in which they have invested heavily. Novation's owners, VHA and University HealthSystem Consortium, together own a majority stake in San Jose, Calif.-based Neoforma under a 10-year agreement.
Neoforma lost $53.2 million in the first quarter of this year (April 30, p. 6).
"The marketplace is pretty important to us. It is the long-term way we need to conduct business," said Eldon Petersen, group senior vice president of Novation. "If suppliers are going to go a different direction from us, we need to know that at the point of the award."
A similar policy to persuade reluctant member hospitals is not necessary because hospitals have been signing on to the online venture in better-than-expected numbers, Petersen said.
Until now manufacturers have presented Neoforma with its biggest challenge. In its annual report, company officials noted they must plug into a critical mass of buyers and suppliers to reach the elusive goal of profitability. They also cautioned that competing marketplaces could seriously hamper Neoforma's business-specifically mentioning the Global Healthcare Exchange, a marketplace funded by the major manufacturers, and HealthNexis, a newly relaunched effort seeded by the major distributors.
Novation officials discussed the new policy at the recent VHA Leadership Conference in Los Angeles. They also happily announced at the same conference that Abbott Laboratories, one of its largest vendors in terms of supplies sold to VHA and UHC members, signed a four-year agreement to participate in the healthcare marketplace.
Besides the business potential Abbott brings to Neoforma's electronic mall-Abbott sells approximately $5 billion worth of supplies to VHA and UHC members annually-the announcement carried symbolic value. Abbott is one of the major manufacturers that founded the global exchange.
Timing is everything. Novation's vast pharmacy contracts, which comprise more than 40% of its business, are due to be awarded this summer.
Officials at Abbott could not be reached for comment. Meanwhile, the several months-old policy has not affected the objective or focus of the global exchange, said Bruce Johnson, an exchange spokesman.
Assuming suppliers do not revolt en masse, the stipulation will help decide which companies are awarded contracts and which are not, Petersen said.
"It's going to be a very important decision criteria. If none of them (sign on), then there is going to be a different decision, obviously, but we haven't seen that happen yet."