Medical Device Link.

Originally Published June 2000

INFORMATION TECHNOLOGIES

Electronic Business: Has Its Time Come for Healthcare?

To catch up with the speeding bullet of Internet time, medical technology companies are moving rapidly to design and implement e-business strategies.

Cliff Henke

A few years ago, several large manufacturers and distributors along with a major industry organization teamed with their customers to research whether efficient supply-chain management tools should be applied to the healthcare technology marketplace. The researchers agreed that they should, but the effort languished as participating organizations and companies couldn't agree on what the next step should be or how it would be funded and managed.

Today, ironically, many of the same companies are now joining industry e-business consortia or launching such services on their own, reversing their decision to table the initiative they participated in only a few months before.

Why the change of heart? This article will examine why medical device companies are jumping into electronic supply-chain management in droves, despite the fact that many have little experience. It will also look at whether companies that have not yet done so are hopelessly behind—or wise to wait.

Current Situation

What a difference a few years make. In 1998, the Efficient Healthcare Response Initiative (EHCR) found that nearly $11 billion annually could be saved if manufacturers, distributors, and healthcare service providers were linked electronically and commercially. The savings was expected to include $6.7 billion in more-efficient product movement (resulting in less warehousing and inventory, for example), $1.7 billion in more-efficient order management (fewer billing and invoicing errors), and $2.6 billion in more-efficient information storage (less duplication of data, standardized data).

Today, according to one recent estimate, 43 Web-based healthcare electronic commerce sites have sprouted up. And this number includes only those companies that are seeking to become industry middlemen, aggregating users, manufacturers, and distributors within the supply chain. It does not include proprietary sites by individual device firms.

Reasons for the Sudden Interest

Industry's change of heart is best explained by the same single factor that has driven the healthcare marketplace for nearly two decades: cost control. The pressures of tighter and lower reimbursement rates in healthcare delivery are working their way back through hospital inventory management systems and down through the supply chain toward manufacturers.

Thus far, the resulting lower profit margins seem to have been paid for with expanded sales volume. "Manufacturers who list their products on our site are reporting sharp increases in sales, and often from places where they had no previous sales," explains Eric Swenson, founder and CEO of mrn.com (Castle Rock, CO). Swenson claims his company, established in 1994, was the first Web site devoted exclusively to sales of medical devices and equipment.

Adds consultant Dick Perrin of Healthcare Concepts (Annapolis, MD): "What you should expect to see from these sites is a reduction in delivered cost. These new business models have to be accountable to hospitals, and affordable."

The e-business sites set up to serve the healthcare market also come with other costs, further squeezing device company profits. Some of these sites allow free-access bidding and competitive pricing from multiple vendors in the same category—a model some hospital and group practice materials managers prefer. However, others charge fees, which are commonly configured as either a listing fee or a transaction commission, but can be a combination of both.

Meanwhile, a growing number of medical device companies offer aspects of e-commerce on their own Web sites. These companies thus supplement the "brochure ware" (i.e., marketing information) and content for patient and physician education that virtually all companies have long offered on the Web.

Concerns about Market Power Concentration

Many of the manufacturers that are choosing this latter route—and especially companies in start-up or early-growth phases—are concerned that they might be "shut out" of the healthcare products distribution system by larger commercial sites. They also worry about the transaction fees being charged, which can erase much of the income needed to prove viability to investors during the early stages of company growth.

For example, Neoforma.com (Santa Clara, CA) signed a 10-year contract with Novation, one of the nation's largest group purchasing organizations (GPOs), to create an Internet portal with pricing, catalogs, and special values for Novation's members. Outpatient healthcare sites within the GPO are already buying through Neoforma; hospitals will be able to access services by the third quarter of 2000, says a Novation spokesman.

Meanwhile, Medcenterdirect.com (Atlanta) has registered 5000 health facilities, including an exclusivity agreement with HealthSouth hospitals. According to a March 2000 filing with the Securities Exchange Commission, Medcenterdirect.com hopes to raise more than $100 million by going public, and expects to open its doors to all hospitals for Internet buying and selling of medical and surgical supplies by midsummer.

In fact, the dot-coms appear to be lining up device buyers faster than they are enlisting manufacturers. The two largest hospital buying groups, Premier and Novation, with combined purchases of $24 billion in 1999, have equity and management stakes in e-commerce start-ups Medibuy.com and Neoforma.com, respectively. In addition, each of these GPOs will funnel a large part of its member purchases through these e-commerce companies. Premier's stake in Medibuy.com is worth $550 million.

Another example is Promedix (Salt Lake City), which recently announced a deal with Tenet Healthcare Corp. (Santa Barbara, CA). The Tenet hospitals include four major Southern California hospitals, such as USC University Hospital, the teaching hospital for the University of Southern California (Los Angeles), as well as the East Cooper Regional Medical Center (Mt. Pleasant, SC). And in March, empactHealth.com (Nashville, TN) announced a founding partner agreement with Health Management Associates (HMA; Naples, FL), a chain of 32 hospitals in the Southeast and Southwest. Under the terms of the agreement, HMA will exclusively implement and use empactHealth's empactBuy service for on-line requisitioning, ordering, and purchasing of all medical and nonmedical supplies and services.

Last winter, concern over such developments led the Medical Device Manufacturers Association (MDMA; Washington, DC) to organize a focus group on e-commerce, which was followed up in spring with a related survey conducted among the association's members. The MDMA survey found that an overwhelming majority of its members, mostly smaller companies, are worried about their lack of market clout in e-commerce and the inordinate expense of sites established by individual companies. According to the Gartner Group (Stamford, CT), e-commerce–capable sites can cost between $2 million and $10 million.

Small device firms are equally concerned about two large-scale efforts, one as yet unnamed, by the largest distributors in the marketplace. The first such e-commerce venture, called the Global Healthcare Exchange, was created by some of the largest device manufacturers in the world. James T. Lenehan, worldwide chairman for the medical devices, diagnostics, and health systems group at Johnson & Johnson (New Brunswick, NJ), insists that the small-company concerns are unfounded, saying that the driving reason for the cooperative venture is to lower e-commerce costs for everyone. "This exchange is a big part of the solution," says Lenehan, "access to state-of-the-art supply-chain management and clinical content without the capital expense."

However, the ever-growing list of firms joining the Global Healthcare Exchange continues to comprise large manufacturers. Becton Dickinson, Guidant, C. R. Bard, Tyco, and Boston Scientific have each announced they will join the original five companies as participants and equity partners in the exchange.

"This is an important factor in our company's e-business strategy to drive productivity for the healthcare industry," says Bard chairman and CEO William H. Longfield. "Our participation is a logical extension of our existing customer relationships." It is a statement typical of those signing up with the new clearinghouse.

It is true that the costs of developing proprietary Web sites are coming down. However, the barriers to market entry are actually increasing, say observers, because the marketplace in the digital economy rewards those who first enter the market and establish the greatest number of business relationships. As a result, most of the sophisticated sites today have been developed by well capitalized Internet start-ups or large, multinational device manufacturers.

Company Actions

Device manufacturers are pursuing three basic electronic business strategies. However, each company combines these strategies differently, pursuant to its own corporate objectives. Several case studies are presented below.

Pharmacia & Upjohn: Enterprise Solution. Pharmacia & Upjohn Inc. (Peapack, NJ), a $6.9 billion global device and pharmaceuticals manufacturer, suffered from poor logistics among its production facilities, warehouses, and marketing subsidiaries. Its five associated businesses produce more than 50,000 different items ranging from medicines to hospital supplies to diagnostic equipment; these units distribute the products globally to more than 50,000 doctors, hospitals, pharmacies, health maintenance organizations, and government agencies.

To reorganize its supply-chain flow, the company invested tens of millions of dollars in the use of state-of-the-art information technology. As a result, Pharmacia & Upjohn is lowering its capital costs through inventory levels that so far are 15% lower in Europe and 5% lower worldwide.

Thus far, the company has not employed electronic business to expand sales. Rather, it did so to strengthen customer relationships and rationalize its own supply-chain system.

Becton Dickinson: Early Adopter. By contrast, Becton Dickinson (BD; Franklin Lakes, NJ) has had a well-shaped strategy since the advent of electronic commerce. The company has been at the forefront of providing support and commitment to groups such as the previously mentioned industry-sponsored EHCR initiative. It has also been a strong advocate and supporter of industry standards in all forms of electronic commerce, in particular the ANSI X.12 standard endorsed by the Health Industry Distributors Association, Health Industry Business Communications Council, and Healthcare EDI Coalition.

When the ANSI X.12 standard was adopted and gained acceptance, BD voluntarily transferred all willing and technologically able customers and distribution partners to the standard. Today, all of BD's electronic commerce activity is based on industry standards for translation formats, for product codification (UPN), and for customer/entity codification (health industry number; HIN). The company has created a substantial presence on its own Web site to share with customers a variety of services in the Electronic Data Interchange (EDI).

Recently the company also joined the new manufacturer-launched exchange. "BD is proud to join with other industry leaders to build this exciting new global exchange for our customers," says Edward J. Ludwig, president and CEO. "This is an important component of our company's overall e-commerce strategy. We look forward to investing BD's know-how and resources to build this capability to provide better services more efficiently." In other words, BD views the exchange as a synergistic add-on to its already well-developed Web presence.

Siemens Medical: Growth by Acquisition. A different approach has been taken by the multinational electronics conglomerate Siemens. Its medical engineering group (headquartered in Erlangen, Germany, and Iselin, NJ) recently announced that it had acquired Shared Medical Systems Corp. (SMS; Malvern, PA) for $2.1 billion. With annual sales of some $1.2 billion, SMS is a leading supplier of services and information technology (IT) systems for administrative and clinical processes in the healthcare industry. The acquired company has more than 30 years of network computing experience, processing 80 million transactions each day and operating the industry's largest information services center and network for application hosting, e-commerce, enterprise systems management, and managed Internet services.

"This action is part of our strategy to strengthen substantially the range of services and IT solutions in the Siemens portfolio," explained Heinrich von Pierer, president and CEO of Siemens AG, at the announcement. "Services currently account for 25% of our [corporate] sales, and our goal is to increase this figure to 50%." He also indicated that Siemens intends to be a bigger player in healthcare information systems and electronic commerce, which the company estimates will grow 10% annually well into the foreseeable future.

"Our aim is to enable more-effective healthcare management while simultaneously helping to improve the quality and lower the cost of healthcare around the world," adds Erich Reinhardt, president of the Siemens medical engineering group. Both executives see cost control and competition as forces driving healthcare e-business not only in the United States but also around the world, and view the acquisition of SMS as an effective response to the increasing demand for streamlined order entry and inventory management from their customers.

St. Jude Medical: Tie-In to Product Design. Other manufacturers are integrating information technology and the electronic customer relationship into actual product design. As an illustration, St. Jude Medical Inc. (St. Paul, MN) introduced a transtelephonic monitoring system, called Housecall, which enables physicians to download a complete set of diagnostic data and device program parameters from a patient's implanted cardioverter-defibrillator (ICD) via conventional telephone lines. In a recent pilot study, the Housecall system was successfully used by 25 patients.

Of course, transtelephonic monitoring of pacemaker patients has been standard clinical practice for many years. Until the new St. Jude system was developed, however, the vast amounts of diagnostic data collected by ICD devices required patients to visit their doctor's office for monitoring and follow-up. The need for visits simply for data collection and device adjustment can now be eliminated. Future Housecall enhancements will include Internet compatibility as part of the company's total Web-based strategy to improve the care of ICD-using patients. An upcoming study to that effect will be conducted at the Cleveland Clinic (Cleveland).

KeraVision: Marketing Focus. In response to increasing competition in the laser eye surgery marketplace, KeraVision Inc. is launching a new high-end Web site to help educate consumers and medical professionals. The consumer section of the new site is designed to educate the general public about its Intacs microinserts as an alternative to eyeglasses, contact lenses, and surgical procedures that permanently alter the eye's central optical zone. The new site will also direct interested consumers to the most experienced ophthalmologist in their area. A traditional print and electronic advertising campaign is also planned to promote the new site.

Explains KeraVision president John Galantic: "We see this Internet initiative as a central part of a strategy to build brand awareness for Intacs and drive procedure volume for the experienced Intacs surgeons who make up our 'Fast Track' provider network." He says this strategy takes advantage of the company's consumer research indicating that most Intacs wearers are highly educated, cautious in their buying decisions, and likely to use the Internet to research their options.

Special features of KeraVision's new site include video testimonials by Intac wearers, high-quality graphics, an interactive on-line vision test that will help people self-qualify for Intacs, an interactive question-and-answer educational section, and a prequalification consumer financing application.

The site will also offer a secure area for Intacs-trained physicians and referring optometrists, where they can read new clinical study data and medical bulletins as well as learn more about Intacs surgical techniques. The company will also post Intacs training programs and downloadable tools that will help physicians build their practice.

GE: Customer-Driven Initiatives. In April, GE Medical Systems (Waukesha, WI) launched a new Web site focused on breast care and women's health. The site, entitled herSource.com, is designed to be an educational and informational resource for consumers, patients, and healthcare professionals. It is one of three sites that the company has launched to tie its electronic presence to customer and user information.

The woman's health site is to be a comprehensive information resource, providing educational materials prepared by credible medical professionals. As such, the company plans to post nonproprietary information as well, including research from government agencies, nonprofit organizations, and advocacy groups.

GE's second customer information site, called planetRAD.com, was introduced at the recent Healthcare Information Management Society Show. The site is designed to provide radiologists with improved access to specialized medical industry information. "The planetRAD.com site is another opportunity for GE Medical to help empower the medical industry," says Peter Arduini, general manager for e-business at GE Medical Systems.

The third site for providers and patients is cardioIQ.com. Like the other two, the cardiology site contains much more nonproprietary information than it does company-owned resources, even if the information leads to purchases of products or services from companies other than GE.

These sites are designed to be extensions of the company's already-well-developed electronic commerce abilities. GE now boasts the ability to take and process orders for more than 8000 diagnostic imaging, cardiology, and patient monitoring–related items at its medical systems accessories site, which was established in August 1999. GE just added its offerings in the cardiology and patient monitoring markets, which include more than 2000 accessories and consumable supplies from its subsidiary, Marquette Medical Systems. The site, which can be reached by clicking on "catalog" at gemedicalsystems.com, also offers special pricing promotions, recommended accessories lists by product, customer order tracking, and fast order capabilities for repeat orders. All customer information and orders are password-protected for security. Customers can look up their order history for use in planning orders and improving purchasing efficiency.

The company's strategy includes not only its own e-business sites but also participation in nonproprietary exchanges such as the manufacturer alliance mentioned above, explains Greg Lucier, vice president and general manager for global services at GE Medical Systems. The idea is to integrate patient and professional information with order entry and fulfillment in a manner that is seamless and open, regardless of how the customer finds the company's products.

The trend to enhance electronic commerce with user information is driving the dot-coms to do the same. Medicalbuyer.com, one of the first such sites in the United States, now has a strategic alliance with Med Solve.com, a Web-based physician portal that provides staff outsourcing alternatives via secure Internet connection.

The idea is for Medicalbuyer.com to create a "one-stop shop" for both supply and administrative personnel needs, explains Andrew Rice, chairman of MedSolve.com.

Conclusion

Now that electronic commerce has rolled out a plethora of Web sites designed to streamline supply-chain management, many site sponsors and users are turning back to what the World Wide Web was used for in the first place: information and education.

Last March, in a move typical of this new evolution in electronic commerce, the Health Industry Manufacturers Association (Washington, DC) began a collaboration with Body1 Inc. to launch a Web site intended to educate and inform consumers and medical professionals about medical technologies that help diagnose and treat patients. The site, called MedTech1.com, will offer Internet users a wide variety of healthcare information, including a searchable database of medical technologies. In addition, the site will provide links to the Web sites of medical technology companies.

To succeed in today's environment, however, any such site must allow visitors of all kinds to compare information with other sites—regardless of whether it benefits the site's sponsors. Experts remind us that those who establish the best customer relationships will gain the most success. Translated into the emerging world of e-business, it may be that the most valuable commodity will not be product price or quality, but marketplace credibility.

Cliff Henke is a freelance writer based in Southern California.

Illustration by Gordon Studer

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