INTO THE INTERNET
Originally Published June 2000
If one is to believe the predictions, trillions of dollars are at stake over the next several decades as electronic business—e-biz or e-business, as it is now known—irrevocably alters commercial distribution channels, and even whole industries. Management expert Peter Drucker has called electronic commerce "transformational" in its potential to change how business has been conducted for centuries. Certainly billions of dollars are at stake now, as huge pools of capital have floated companies that only a few years ago existed merely in concept. Most still do not make money, yet they continue to spring up.
What's the attraction? Is e-business worthy of its hype, at least as regards the healthcare supply chain? This article will address those questions, as well as provide an overview of where e-business is today and what its future may hold for the medical device industry. Along the way, it will also try to distinguish rhetoric from reality.
THE ELECTRONIC COMMERCE PROMISE
New technologies have radically changed the potential of business-to-business media to act as "infomediaries" and brokers of business-to-business commerce. According to data compiled by Forrester Research (Palo Alto, CA), the e-commerce share of the medical device industry is expected to reach nearly $3 billion in 2001, and to surpass $14 billion in 2003.
The increasing number of companies devoted to electronic supply-chain management in healthcare are looking at much larger figures. According to the U.S. Department of Health and Human Services, the entire healthcare sector within the United States alone generates approximately $1.1 trillion annually, or 12% of the nation's gross domestic product. U.S. Department of Commerce data estimate that roughly $300 billion worth of medical supplies, services, and pharmaceuticals are purchased globally. This latter figure is commonly referred to as the medical technology supply chain.
These companies and other stakeholders involved in healthcare technology manufacturing, supply, and service delivery have become increasingly interested in finding more efficiencies in this huge sector of the economy. According to Forrester Research, between 18 and 45% of the cost of sales in the supply chain could be saved using state-of-the-art technologies such as electronic data interchange and electronic commerce.
EARLY INDUSTRY INITIATIVES
In 1998, several large healthcare providers, distributors, and manufacturers conducted a study assisted by KMPG Peat Marwick, Computer Sciences Corp., and the Health Industry Distributors Association. Called the Efficient Healthcare Response (EHCR) Initiative, the project found that nearly $11 billion annually could be saved if manufacturers, distributors, and healthcare service providers were linked electronically and commercially. This savings includes $6.7 billion in more-efficient product movement (less warehousing and inventory, for example), $1.7 billion in more-efficient order management (e.g., fewer billing and invoicing errors), and $2.6 billion in more-efficient information storage (less duplication of data, standardized data, etc.).
New Business Media (Huntington Beach, CA) conducted another study that included medical technology manufacturers and their suppliers of raw materials, components, subsystems, and services. It concluded that similar savings could be realized by establishing linkages, and, moreover, that a definite willingness to act was present in this segment of business not typically considered part of the healthcare supply chain. Like the EHCR Initiative, however, this study also found a distinct lack of industry leadership with the vision and commitment to realize these efficiencies.
CURRENT MARKET LANDSCAPE
That was 1998. According to one analyst's estimate, more than 30 major Internet start-ups have appeared since then to streamline the medical technology supply chain. Several of these are well capitalized by public stock offerings. They include a variety of "verticals," or on-line communities of buyers and sellers in diverse segments of the healthcare market. While companies such as VerticalNet (Horsham, PA) are only partly devoted to healthcare (according to some financial reports, the company's sites for heavy industries are its most profitable), others such as MediBuy.com and Neoforma are specifically devoted to wringing savings out of the medical products distribution system.
The announcements of new on-line services for medical supply-chain management appear on an almost daily basis. In addition, there will be two conferences with accompanying trade shows devoted entirely to e-commerce in healthcare this year, with many other conferences basing a major proportion of their programs and substantial exhibitor participation on this subject.
However, it is two recent developments—having transpired within a month of each other—that are likely to reshape the healthcare e-commerce landscape. In late March, Johnson & Johnson, GE Medical Systems, Baxter International, Abbott Laboratories, and Medtronic announced that they are creating a global healthcare exchange that will be an independent, Internet-based company. This new, privately held trading exchange will help healthcare providers make quicker, more-efficient purchasing decisions by simplifying business processes and offering a single source for customers' healthcare purchases, according to company statements. Because the exchange is organized by some of the biggest names in medical technology, at its inception it will carry a majority of the types of products and services used by healthcare providers.
"Every healthcare system around the world is under enormous pressure to create efficiency and take out costs," says James T. Lenehan, worldwide chairman of the Medical Devices, Diagnostics, and Health Systems Group at Johnson & Johnson. He adds that, "This exchange is a big part of the solution—access to state-of-the-art supply-chain management and clinical content without the capital expense."
Jeff Immelt, president and CEO of GE Medical Systems, states that, "Healthcare now requires the speed of the Internet and the staying power of trusted, experienced industry leaders. This venture combines both, and is the perfect extension to our long-standing customer relationships."
The independent, on-line enterprise intends to facilitate the exchange of information related to buying, selling, and distributing medical equipment, devices, and healthcare products and related services worldwide, and also to provide access to extensive clinical content. Moreover, it will not be confined to the founding companies' products and services, but will provide equal access to as many healthcare manufacturers, suppliers, distributors, providers, group purchasing organizations, and other healthcare trading partners as want to participate.
Financed through equity investments from the founding companies, the enterprise will charge no transaction fees to customers buying products through the exchange; rather, participating suppliers will fund operations. When it is launched, the exchange will offer on-line ordering with customer-directed distribution, on-line inquiry of order status, on-line order confirmation, and product catalogs with access to correct contract terms. Soon after, the exchange will feature value-added services such as clinical information on a broad range of products.
"This new on-line exchange has the potential of dramatically reducing the number of technology systems that we currently need to procure and purchase products, and providing access to accurate and timely information. It should save time and money, and enhance our focus on what we do best—providing the best possible care for our patients," says William J. Donelan, executive vice president, Duke University Health System.
The first generation of the exchange will go on-line in the third quarter of 2000. Although the exchange will focus initially on serving customers in the United States, it will rapidly expand to support healthcare providers globally in 2001.
The headquarters of the new company will be in Chicago. The exchange will be supported by the combined technical resources of GE Global Exchange Services and a strategic alliance between Ariba, IBM, and i2.
Not to be outdone, five of the nation's largest healthcare wholesale distributors—AmeriSource Health, Cardinal Health, Fisher Scientific International, McKesson HBOC, and Owens & Minor—announced in April that they have agreed to form an Internet-based company that would be "an independent, commercially neutral" healthcare product information exchange. The company will be focused on identifying, purchasing, and distributing pharmaceutical products, medical and surgical products and devices, and laboratory products and services. The five participating companies expect to complete a definitive joint-venture agreement by the end of July, and begin implementation of the exchange by the end of the year.
"We are in a unique position to help manufacturers, distributors, and providers—essentially everyone involved in the healthcare supply chain," says Robert Walter, Cardinal Health chairman and CEO.
"Essentially, we will create a new, more-efficient standard of healthcare purchasing," adds Paul Montrone, Fisher Scientific International chairman and CEO. Like the manufacturers, these wholesalers enjoy a dominant market share. The competitive advantage of the wholesale venture, however, is that the founding members already distribute products from nearly all suppliers. They also have established direct middleman relationships with manufacturers' customers and device end-users. Collectively, the founding members of the prospective distributors' exchange process millions of healthcare product orders each day from hospitals, pharmacies, laboratories, physician offices, and long-term-care sites.
The new exchange also expects to work with group purchasing organizations (GPOs) and healthcare product manufacturers, which the distributors acknowledge have been developing their own Internet-based exchanges. Still, the founding members believe that there remains an untapped business opportunity to work with GPOs to reduce costs, eliminate redundancies, and improve customer service.
"All customers will realize the value of their efforts more quickly and more certainly as a result of this initiative," insists John Hammergren, co-CEO of McKessonHBOC. "Virtual organizations like this new exchange allow the industry to raise efficiency and quality at the same time. This is an important and fitting role for the nation's healthcare distributors."
Specifically, the wholesalers' exchange seeks to simplify the complex and numerous steps required to manage healthcare product rebates; establish an industry standard for product information, including the use of common code numbers and electronic systems; offer standardized access to thousands of manufacturer product catalogs on the Internet, where they can be refreshed and updated continually for use by healthcare providers; and simplify order entry and processing procedures for healthcare purchasing professionals.
The founding members expect the new distributor exchange to require investments totaling more than $100 million. The exchange will be an independent company with its own management team and board of directors, but the founding companies' CEOs will constitute a majority of the board.
The leadership of the exchange will also be free to explore strategic partnerships that further open customer access to an even greater array of products and cost-saving services, exchange officials say. "This commercially neutral portal is expected to link the broadest and deepest network of business, technology, and healthcare providers and manufacturers on the Internet," explains Paul M. Montrone, chairman and CEO of Fisher Scientific International. Because the five companies already have considerable experience in information technology, the wholesalers' portal should give them another leg up against the competition, he adds.
EVOLVING PRICES, PROFITS, AND FOCUSES
Most observers expect that the prices e-business organizations can charge their customers, as well as their profits, will fall as more and more prominent companies develop e-commerce services for healthcare. This scenario has already occurred, for instance, in the auto industry, when share prices of Autoweb.com, Autobytel.com, and others plummeted upon news that Big Three auto manufacturers would form an on-line buying exchange of their own.
However, the existing Internet companies are not standing still. For example, some e-commerce firms are looking to help streamline the allied healthcare industries, which heretofore have not participated in electronic supply-chain management as much as more institutional areas of healthcare delivery have. GeriMedix, a New York City–based supplier of medical products, equipment, and services to nursing homes and assisted-living facilities, will move essentially all of its approximately $10 million annual purchasing of medical supplies and equipment to Neoforma.com's on-line marketplace. To this end, GeriMedix and Neoforma.com are working together to build an easy-to-use, Web-based solution for long-term care that will improve the current inefficiencies in the supply chain of that industry segment.
As evidenced by the imminent manufacturer and distributor portals, e-commerce has changed the strategies of the companies involved. Another version of this move to e-commerce is how traditional brick-and-mortar companies, as well as the new dot-coms, are finding they can form partnerships that add value to both. The experiences of the Internet firm Promedix.com (Salt Lake City, UT) are illustrative of such linkups, which result in entities sometimes called "bricks and clicks."
"We thought we'd be displacing distributors. But we convened a group of five hospital buyers as advisers, and over time they convinced us of the value of bringing the specialty distributors along with us," says Peter Nyberg, vice president of strategic business development for Promedix.com. "Now, the current thought is that we need to reintermediate the specialty distributors and give them incentives to work on our behalf."
One of the problems faced by Promedix.com was that specialty distributors already had close and often perk-filled relationships with hospitals and, especially, with doctors. Promedix found that although the Internet can bring great efficiencies to a market, it cannot replace the relationship-building effects of traditional companies.
Instead, the firm now believes it has found a profitable niche in brokering the sales of specialty medical products like surgical instruments and catheters. Such products are sold through what Promedix.com calls a "highly unbalanced" channel of more than 1200 local and regional specialty distributors. The decentralized nature of their business makes it difficult for individual hospitals to research, locate, and purchase these products through local distributors.
"There's rampant price gouging going on," Nyberg says. "Manufacturers and specialty distributors hold all the information, and buyers are at an incredible disadvantage. We're focusing on a piece of the supply chain that is fundamentally flawed and broken."
ADDING VALUE TO E-COMMERCE
Such bricks-and-clicks partnerships have prompted some Internet companies to respond with "brick-like" services of their own. For example, Omnicell.com (Palo Alto, CA) now offers OmniBuyer, an on-line procurement application that enables customers to streamline their purchasing processes by allowing healthcare facilities to automatically reorder stock from point-of-use dispensing systems when supplies and medications hit the reorder point. In addition, Omnicell provides Web-enabled supply-chain management and ERP solutions. These applications are designed to serve healthcare organizations that do not have the skilled supply-chain and IT personnel necessary to operate advanced supply-chain management techniques in-house.
Another idea is that of TradeMD (Garden City, NY), which has teamed with Eloquent Communications (San Mateo, CA), a developer of trade multimedia services over the Internet. TradeMD will use Eloquent's communications technology to provide product information from healthcare industry experts to interested buyers of medical equipment over the Internet. Integrating product information into the on-line selling process meets a critical need for buyer research and can eliminate costly direct sales calls, says Yuval Lirov, CEO of TradeMD.
TradeMD's e-marketplace will also offer product assessments from leading industry experts via on-line expert seminars that will be available on demand.
More than cost savings, however, e-commerce and other information technologies have already dramatically reduced new products' time-to-market. Both manufacturers and healthcare providers are increasingly demanding faster availability and higher quality of their products and services, because their customers—the payers and users of healthcare—are demanding it of them. Ultimately, thanks to new technologies and intensifying competition, today's product-oriented supply chain will lead to a value-oriented one, observers predict.
As a recent study by Battelle Laboratories reported, speed is becoming the "new economic order" as time to market shrinks to an average of 18 months, or even less in some industries. Fierce competition, coupled with a new wave of innovation and technology-based products and services, has shortened cycles between the market introduction of a product and its eventual replacement by superior products or services. The ability to innovate and get to market faster is becoming a more important determinant of competitive advantage. In some sectors, such as information technology, the pace of innovation causes such rapid obsolescence that firms have to sprint just to stay in place: computer components, for example, lose about 1% of their value per week. In other sectors, such as automotive manufacturing, global competition has led to significantly compressed product development cycles.
The Battelle study found that in 1990 new U.S. products took an average of 35.5 months to reach the marketplace, but by 1995 companies were introducing new products in an average of approximately 23 months. This trend affects a host of industries. For example, autos that took six years from concept to production in 1990 now take two years.
Currently, 30% of 3M's revenues are from products less than four years old, while 77% of Hewlett-Packard's revenues are from products less than two years old. New products accounted for a third of corporate products in the 1980s, up from 20% in the 1970s. IBM had more than 30% of its 1995 patents incorporated into products by 1996. Moreover, the speed of processing goods and services has also gone up. Between 1979 and 1997, the ratio of unfilled orders to shipments for U.S. manufacturers declined by 25%.
Now, in the frenetic Internet economy, people talk about technological evolution in "Web years"—three-month periods—because the rules of the game seem to change that often.
"The most important challenge in healthcare today is 'transitional medicine,' or getting the information discovered on the lab bench to the bedside," says Patricia Flatley Brennan, professor of nursing in the University of Wisconsin's School of Medicine and current president of the American Medical Informatics Association. Brennan and her colleagues have developed a Web-based service that helps home-bound patients recovering from heart bypass surgery improve their self-care and shorten recovery time.
Thus, the next stage of e-commerce opportunity will move from the marketing, distribution, and service links of the supply chain to the R&D and discovery end of the chain. "A major future challenge we face will be to create and maintain data resources that can bring together all the various disciplines involved in developing new technologies," maintains Wolfgang Hoch, a lead researcher in the bioinformatics department at Amgen (Thousand Oaks, CA). Indeed, Hoch argues that "requirements for future success" in the bioscience industries will include an on-line community that makes information available on a widespread basis and is searchable and easy to use.
"Information is not knowledge," explains David Galas, chief academic officer of the Keck Graduate Institute of Applied Life Sciences at the Claremont Colleges. "What is needed is to construct models that will help predict the clinical effects of these discoveries." In pointing the way to the future, says Galas, "biology is fundamentally an information science. A cross-disciplinary approach is absolutely key" to successfully exploiting this onrush of data. In short, the next wave of e-business will incorporate in a seamless fashion not just ordering, manufacturing, and inventory management, but the clinical effects of new discoveries and their impact on patient well-being. To that end, everyone—from third-party payers to patients to researchers to healthcare practitioners—must make sure they are not only on-line but conceptually wired into the rapidly evolving healthcare supply chain.
Cliff Henke is a freelance writer based in Arcadia, CA.
Illustration by TIM LEE/SIS
As in many industries, a growing number of healthcare companies have already launched Web sites that incorporate a broad variety of Internet business models. In fact, most of these sites expect to generate revenue streams in several ways. Here, in alphabetical order, is a short summary of these business models:
Auctions: In an on-line auction, prospective shoppers on a Web site propose escalating prices to a seller, and goods are sold to the highest bidders. Sometimes deposits are received on-line with the remaining funds transferred upon delivery of goods; other times, the entire transaction is conducted on-line or through escrow.
Electronic Malls: These are among the earliest business models on the Internet. These sites lease "space" to firms wishing to sell or publicize goods and services to visitors. Fees are typically charged monthly or annually. Sometimes, the mall spaces will have hyperlinks to the companies' own Web sites.
Electronic Catalogs: Larger than electronic malls, which typically contain only "brochureware," catalogs will offer specifications, performance data, and price lists, just like their print-based predecessors. An increasing number of these sites offer opportunities to purchase products on-line. Site revenues are thus generated by both listing fees and transaction commissions. Some sites track leads generated from site visits and charge per-lead fees, as well.
Exchanges: These sites take the electronic catalog concept a step further by providing on-line standardized procurement methods. They aim to maximize efficiency by developing systems that are compatible with existing, or "legacy," computerized inventory management tools, purchasing/order-entry technologies, and other electronic data interchange systems.
Information Hubs/Infomediaries: Initially starting out as portals or search engines, these sites now tailor aggregated information for presentation to users based on their specific interests (usually a profile is created by tracking past on-line habits and/or requiring visitors to complete questionnaires as part of an authentication process). These sites offer other services as well, such as industry directories, malls, and auctions.
Reverse Auctions: These allow sellers or visitors to name their price, and the price ultimately settled on can be either on a first-come, first-served basis or via a traditional auction if enough visitors are willing to buy at the suggested price. The attraction for sellers is the ability to better manage the demand fluctuations in their marketplaces. However, reverse auctions involve substantial promotional capital to generate visitor traffic. For example, Priceline.com, the first reverse auction, had to purchase airline tickets and offer them below cost for many months as inducements to visit the site.
RFP Hubs: Procurement is often a multiple-step process, especially in markets where technical proficiency and performance is just as important as price. In these transactions, a request for proposals (RFP) is prepared and respondents suggest their terms for a deal. An on-line or traditional negotiation stage can follow. These are complicated sites, however, involving high levels of security and few transactions. Fees on business completed on such sites are therefore usually higher than with other e-commerce business models.