The Other Side Of The Desk

Edition: August 2001 - Vol 9 Number 08
Article#: 1036
Author: Lynn James Everard, C.P.M., A.P.P Contributing Edi

E-Commerce in health care continues to languish in hopes that a solid value proposition will appear and energize what to date has been a painfully slow adoption rate.


Recently, Andersen (formerly known as Arthur Andersen) was engaged by Novation and Neoforma to identify specifically what value E-commerce can have for health care manufacturers, distributors, and providers.


The 50-page report, which is available at the Andersen website and that of Novation, is the first serious attempt by anyone in the health care E-commerce sector to use proven methods, such as activity based costing, to determine the potential impact of the technology.


In other words, there finally exists a value model for E-commerce!


The report looks at the impact of E-commerce on manufacturers, distributors, and providers. However, since this column is focused on helping distributors better understand their customers, we will focus our attention on the impact on providers, then later, discuss the ramifications for suppliers.


Potential Savings


The Andersen study determined that value could be achieved for providers in the range of 1 percent to 3 percent of total supply cost.


At first glance, this number may not seem all that significant. But consider that for every $100 million dollars in annual supply spending, a hospital using E-commerce could save from 1 million to 3 million dollars.


However, this number must be put into perspective. While a hospital may have $100 million dollars to spend, it is not guaranteed that it has the ability to save 1 to 3 million dollars per year. Clearly, it is impossible to save dollars that are not being spent currently.


Still, the point is that E-commerce provides a significant savings opportunity that should not be minimized or overlooked.


''Although many supply chain constituents believed the savings would be larger, you have to remember that most providers struggle to break even or to make a 1 to 2% margin,'' says Kevin Connor, a senior manager from Andersen and one of the authors of the study. ''The savings indicated in the study can have a substantial impact on the economic health of a provider organization.''


It should also be clear that E-commerce is only part of a supply chain strategy that can be used by hospitals to reduce their total procurement costs. A strong commitment on the part of administration to improve processes and not just automate inefficient ones is vital to any cost management strategy.


''Although it was not quantified in the study, other benefits will emerge from the adoption of E-commerce,'' continues Connor. ''Resources that are captured as a result of the new efficiencies can be redeployed to value-creating activities.''


''Too much time is wasted on rework and not enough on building relationships with clinical staff and physicians. A new found focus on standardization and utilization management will increase the savings significantly.''


The study also found that EDI (electronic data interchange) is still used in only about 31 percent of the transactions that would be eligible for transmission this way. So even without jumping all the way to E-commerce, significant opportunities still exist in automation. Still, given the superiority of E-commerce over EDI, one would probably be much better off investing in E-commerce.


Everyone Benefits by Reduced Errors


One of the banes of existence for every hospital, both in Purchasing and in Accounts Payable, is the expense of rework related to processing errors. The study found that an integrated E-commerce solution could reduce processing rework by up to 52 percent.


If hospitals are spending that much time doing rework, their suppliers probably are too. Moving to E-commerce could be extremely beneficial to both. After all, less time spent on rework means more time spent on sales and sales-related activities.


Every provider is concerned about overpaying their suppliers as a result of transaction errors and database errors (the correct contract price not being loaded), but few really know how much they are overpaying.


According to the Andersen study, providers can overpay suppliers by as much as 2 percent to 7 percent for contracted medical surgical products. The ability of E-commerce to accurately capture data could contribute to a significant reduction in overpayments. While this is good news for providers, it should be even better news for distributors. Why? Because if providers are assured that they are not overpaying, they will develop a greater trust in their distributors, and that can only improve relationships.


The modern hospital is often a shrine to advances in medical technology. Unfortunately, most of those advances stop just outside the door of the materials management department, where paper requisitions and paper purchase orders are still the order of the day.


The Andersen study reveals that as much as 40 percent of a buyer's time and 68 percent of an accounts payable employee's time is spent manually processing transactions. Clearly, there is significant opportunity to reduce costs through E-Commerce.


However, in this area, as in several others, E-commerce by itself won't get hospital materials management departments where they need to go from a technology perspective. Other investments will need to be made, primarily in software, but some in hardware as well, at least upgrades. Fortunately, a growing number of application service providers are making new technology more affordable and in many cases, they are using the Internet to do so.


The Price is Always Right


One area that the study looked at was contract management. To obtain the lowest price for the thousands of items they buy, hospitals must buy from hundreds of different suppliers. Each supplier contract relationship requires a separate contract document.


Managing a portfolio of contracts is a daunting task, given all the renewals, renegotiation, and shortages and chargebacks. And although being a member of a GPO means that someone else is doing the contract negotiation, the hospital is still responsible for making sure that the actual prices charged are the contract prices. The sheer volume makes it very difficult to be error-free.


One of the most significant advantages of E-commerce is the power it gives providers to manage their contracts in a single repository and to make available real time validation of prices at the time an order is placed. This is in sharp contrast to finding pricing errors on invoices. Validating pricing on the front end not only saves time, but also it helps prevent the errors that cause rework from happening in the first place.


How Does This Affect Distributors?


So, finally, someone has quantified some of the value of E-commerce. But what does this mean for distributors?


First, we know that E-commerce by itself is not the answer. The services offered by distributors can be a very important piece of the cost management puzzle for their hospital customers. Hospitals need their distributors to step forward and offer services that will make the transition to E-commerce easier and make attaining process efficiency a more reachable goal.


Now is the time to clearly demonstrate that all of your services can actually produce realizable, quantifiable results for your hospital customers.


Secondly, EDI is alive and well, but only until full-fledged E-commerce moves in. If you are doing EDI, don't abandon it just yet. But if you are not doing EDI, you are probably better off embracing E-commerce and moving forward.


Third, if your company is using E-commerce for its upstream supply chain transactions, let your customers know about that. Answer their questions about how it is working and what your company had to do to get ready. You may need to involve your own purchasing managers in these discussions. And there is a good chance that the two purchasing people will find common ground, which you as a salesperson have had trouble finding.


KEY FINDINGS


The Andersen study, on which the company's report, ''The Value of e-Commerce in the Healthcare Supply Chain,'' was based, was conducted by visiting 12 supply chain sites, including direct manufacturers, indirect manufacturers, distributors and pharmacy wholesalers and providers. Following are some of the key findings by industry segment, as well as results that could be realized once a fully mature e-commerce solution is adopted by the entire supply chain:


Distributors


• fully integrated e-commerce solution can help distributors improve net operating margin 24 to 70 percent, which equates to a total benefit of 1.3 to 9.8 percent of Selling, General and Administrative (SG&A) expenses.


•Medical-surgical distributors can optimize their sales force time by minimizing rework and nonvalue activities with a benefit range of 4.75 to 12.75 percent of revenue.


•Only 14 percent of medical-surgical distributors' sales representative time is spent selling products or educating customers.


Manufacturers


•A fully integrated e-commerce solution can lead to a revenue increase of 1 to 14 percent for early adopters from optimizing their sales force time by minimizing rework and nonvalue activities.


•Increase in net operating margin potential ranges from 2 to 57 percent, varying dramatically depending on the type of manufacturer, current technology state and level of e-commerce implementation.


•Sales representatives spend 25 to 49 percent of their time on administrative tasks that can be significantly reduced by e-commerce.


•Fill rates can be improved if suppliers and manufacturers have visibility of transactions throughout the supply chain.


Providers


•Value can be created in a range of 1.25 to 2.45 percent of total provider supply costs by fully utilizing e-commerce capabilities.


•Current use of electronic data interchange (EDI) represents only 31 percent of total eligible transactions.


•An integrated e-commerce tool can reduce the rework related to processing errors by as much as 52 percent.


•Providers can overpay suppliers anywhere from 2 to 7 percent for contracted medical-surgical supplies.


•As much as 40 percent of buyer time and 68 percent of accounts payable time is dedicated to the manual processing of transactions.


Entire Health Care Industry


•Real-time sales and purchase information can help suppliers track sales and providers better manage utilization and standardization.


•Supply chain participants should be able to troubleshoot 50 to 75 percent of their problems.


•All supply chain constituents can minimize errors and related rework.


•As much as 85 percent of all purchase orders and invoices can be converted from manual to electronic.



Source: ''The Value of eCommerce in the Healthcare Supply Chain: Industry Study Report,'' Andersen, June 2001.