The Other Side Of The Desk

Edition: January 2002 - Vol 10 Number 01
Article#: 1143
Author: Lynn James Everard, C.P.M., A.P.P

The majority of the year 2001 was relatively calm for the health care supply chain. Other than the expected and perhaps overdue demise of many dot.coms, the year was headed toward a less-than-memorable finish. But then, late in the year, we experienced a torrent of press releases heralding deals and strategic relationships between disparate elements of the supply chain. The year had started with divisions among different links in the supply chain that we had come to expect. Sure, we may have been thrown off a little by the partnering of group purchasing organizations and dot.coms the year before, but at least we understood what was driving them- information. But the relationships announced near the end of 2001 were different.

Who Makes Up the Supply Chain
Before looking at these events, it may be helpful to review the links in the supply chain and their traditional positions vis-à-vis each other. Hospitals, alternate site organizations, and home care organizations make up the provider segment of the chain. They are the ultimate consumer of the medical products pushed through the chain. Next are the distributors, who buy products from manufacturers and deliver them to providers. Manufacturers are those who make the products themselves.

Should GPOs be considered part of the supply chain? Historically, they have represented providers by leveraging volume to extract lower product prices from manufacturers and distributors. Certainly, it can be argued that over the last several years, GPOs have taken on more of the role of brokers seeking to represent the interests of providers, manufacturers, and distributors all at the same time. But because GPOs do not take title to product in the traditional sense, they should be considered adjuncts to the chain rather than actual links in it. They are intermediaries.

Innocence Lost
The concept of e-commerce seemed innocent enough when it first appeared on the scene. Many supply chain members expected that the newfound efficiencies of e-commerce would more than pay for the cost of developing and maintaining the technology used to power it. But rather than embracing the technology, the traditional links in the chain got threatened by it. E-commerce companies were really nothing more than technology providers, but because they projected such unbelievable profitability expectations, they left the supply chain shaken. Everyone knew that somebody was going to have to pay for the technology, yet no one wanted to do it. Enter the manufacturers, who created the Global Health Exchange; and the distributors, who formed the New Health Exchange (later HealthNexis). The GPOs, meanwhile, were setting their sights on the e-commerce game themselves.

The goal was simple: By diving into e-commerce, anyone could either make the money promised or, better yet, avoid having to pay for somebody else's projected profits. But just to make sure that all bets were covered, virtually every major manufacturer and many distributors rushed to develop their own stand-alone e-commerce Internet portals.

But the dot.coms presented yet another threat to the supply chain. They are not links in the chain. Rather, they are providers of services to others in it. However, if they could collect transaction data, they could potentially use it to leverage power and become a link in the chain- and a powerful one at that. Some of the larger national GPOs were the first to recognize this, and they acted quickly to align themselves with- or to own- an e-commerce company. But GPOs are not technology companies. (Of course, in hindsight, it appears that in some cases, some of the technology companies were not technology companies either!) Perhaps never before in the health care supply chain has so much money been spent to accomplish so little. As we begin the year 2002, it appears that the most significant product of the technology companies is their ability to use press releases to sensationalize trivial accomplishments.

Surprising News
The first big news (in late August 2001) was the decision by Neoforma (an e-commerce company that is majority-owned by Novation, VHA, and the University HealthSystem Consortium) and GHX to form a strategic partnership. Why would GHX do this? Did Neoforma have something really good that GHX wanted? Was GHX looking to keep tabs on a competitor? Many in the health care supply chain thought that given just a little more time, Neoforma might fold on its own. Certainly, Novation, VHA, and UHC would have been somewhat tarnished by a failure. Given the Neoforma stock's rise in the days after the deal was announced, there had to be at least some happy insiders at Neoforma and perhaps Novation, VHA, and UHC.

The next piece of news, delivered in November, was just as intriguing- GHX and AmeriNet formed a strategic partnership. The last time hospitals checked, GPOs were supposed to be on their side. Not that partnerships are a bad thing. Used wisely, they can be of tremendous value. Personally, I have been advocating them for years. But the partnerships I favor are those between hospitals and suppliers. So who does AmeriNet represent now that they have this relationship with GHX? Is it the manufacturers, or the hospitals?

Then in late November, after months of delay, the worst-kept secret in the health care supply chain was announced: GHX and HealthNexis would merge. So now we have the manufacturer-led e-commerce company aligning with the distributor-led e-commerce company.

What do all of these deals mean and how will they affect the health care supply chain in 2002?

Predictions for 2002

1. It appears that 2002 will be a quiet year in the land of e-commerce. There are not many more deals to make because there just are not many more companies left to make deals. Furthermore, most of what passes for e-commerce is still EDI connected through a web site. Customers have still not become important enough for dot.coms to create a powerful value proposition. And non-EDI volume is still small.

2. Premier and medibuy- its e-commerce partner- have been missing from the deluge of press releases. Surely something will happen with them early in 2002.

3. All of these deals must make hospital administrators and directors of materials management very concerned about their place in the supply chain. From their perspective, it may appear that all of the other links in the chain are melting together, leaving only two links left: 1) the hospital, and 2) the combination of manufacturers, distributors, GPOs and e-commerce companies. Who is on the hospital's side? Who can they trust? The industry might see a dramatic increase in direct contracting initiatives and a move to strategic sourcing in the year ahead. Distributors will need to keep their value propositions fresh and relevant to the needs of their customers.

4. Are all of these deals even legal? Before 2002 is over, someone is going to want to know. As it is, two U.S. senators are set to begin an investigation into the potentially anti competitive practices of health care GPOs. This may catch their attention as well.

5. The health care supply chain is filled with inefficiency, especially at the provider level. Yet given manufacturers' propensity to stay away from initiatives designed to increase provider supply management efficiency, one can only assume that they have decided that in the end, everything will come down to price. If they are right, they might wish they were wrong. Scores of foreign manufacturers, many of whom already make the majority of products used in this country's health care system (although they are branded under more familiar names), are ready to enter the U. S. market on their own. The year ahead could very well see the first significant movement in that direction.

6. U. S. distributors may stand to gain much if they take on foreign product lines. Customers may be very interested in moving to these lower-priced products. Still, it is almost certain that any distributor who moves in that direction will risk some of the lines that they represent. It could be a good time to be a distributor-only organization, especially if one is willing to run the risks and take on foreign product lines.

7. The industry is buzzing with talk about data standards, and several organizations are working on standards. One would think that the coming together of manufacturers, distributors, and GPOs would accelerate the effort. But the reality is that standards are really more for an EDI world, not so much an Internet world. Standards also tend to favor the customer, who would be able to compare prices among manufacturers that much easier. That is bad news for manufacturers, who are looking for ways to maintain a competitive advantage. The bottom line on data standards: Don't expect too much movement in 2002.

8. Suppliers do not like to pay fees of any kind to any link in the chain. A high level of supplier involvement in e-commerce makes it hard for anyone to charge transaction fees. The reality, though, is that even if fees are charged to the supplier, the buyer ends up paying. Look for suppliers to effectively eliminate themselves as the targets of any attempts in e-commerce to extract transaction fees.

9. For the past few years, suppliers and buyers have both been blamed for the slow adoption of e-commerce. But it has largely been the dot.coms and the GPOs who have been doing the blaming. Now that suppliers, GPOs, and dot.coms are a little closer together, look for the finger-pointing to stop. But don't look for suppliers to make e-commerce easier for the buyer to embrace through value creation efforts.

10. The health care supply chain is rapidly evolving. I just hope someone prints programs frequently, so we will always know who is on what side from one moment to the next. Fans of the Wild West will no doubt feel right at home in the supply chain of 2002, which will continue to closely resemble a free-for-all. The thought of what might happen next year and beyond almost makes one wistfully long for the good ol' days of adversarial relationships. At least we knew where everyone stood.

Lynn James Everard, C.P.M., A.P.P.
Contributing Editor