A Broad Approach to
Materials Management

Edition: September 2002 - Vol 10 Number 09
Article#: 1305
Author: Repertoire

As a self-proclaimed “cost management company,” Broadlane defies easy categorization. Part group purchasing organization, part e-commerce entity, part outsourcing firm, the San Francisco, CA-based company services more than 450 acute-care hospitals and 1,400 sub-acute-care facilities.

Its roots lie with Tenet Healthcare, the Santa Barbara, CA-based for-profit hospital system. In 1999, David Ricker, who headed Tenet’s materials management department (and its group purchasing program, called BuyPower), proposed that Tenet bundle its contract portfolio with its other (mostly technology) assets, then spin them off as a separate service for Tenet hospitals as well as other provider organizations. In December 1999, Broadlane was formed, primarily by shareholders Tenet and Ventro, an e-commerce company based in Mountain View, CA. Today it is a privately held, independent company.

“The notion was that if you take a terrific portfolio of contracts and a leading materials management operation, and marry them with the new [e-commerce] technology, you create a powerful hybrid that can address supply chain inefficiencies as never before,” says David McAdam, who heads Broadlane’s marketing and communcations.

The chairman and chief executive officer of Broadlane is Trevor Fetter. Prior to joining Broadlane, Fetter was Tenet’s CFO and chief corporate officer. By his own admission, he knew very little about group purchasing when he joined Tenet. But by 1999, he had come to believe in the company’s ability to keep down supply expenses. He also recognized that Tenet’s centralized materials management system was “an essential part of our tool set.”

A year later, Ventro fell on hard times. In December 2000, the company closed its Promedix specialty medical e-procurement site. Then, in March 2001, Broadlane dropped its relationship with Ventro (which held a 19 percent stake in Broadlane) for failing to deliver on some of its promises. (Ultimately, Ventro was absorbed by another company.)

Lee Marston, the former chief information officer at Owens & Minor, whom Broadlane had hired in the fall of 2000, began building an e-commerce platform for Broadlane. The company went live with its business-to-business exchange in April 2001.Today, Broadlane offers four sets of services:

• Contracting services. Broadlane maintains approximately 740 contracts with 410 suppliers. Total purchasing volume is expected to be $3.6 billion this year.

• Technology services. Broadlane's technology services are built on the technology platform of BroadLink™, a private e-commerce exchange that allows providers to conduct electronic transactions with their suppliers. (In June, Broadlane and Global Healthcare Exchange signed a three-year agreement to connect their respective Internet-based trading exchanges.)

• Operational services. For some customers, Broadlane provides management oversight and/or on-site clinical resources to assist them with managing their entire supply chain operation. Broadlane also provides services designed to increase contract participation, standardize product selection and optimize product utilization. These services range from best-practice-strategy consulting to the complete outsourcing of the procurement function.

• Assessment services. Broadlane provides either benchmarking or on-site assessments of its customers’ materials management organizations, supplies and purchased services, contract management, clinical strategy, product requisition and ordering, item master review, inventory management, accounts payable, distribution/logistics and materials management information systems.

Recently,Repertoire spoke with Broadlane CEO Trevor Fetter, and Northeast Managing Director Joe Greskoviak about Broadlane.

Repertoire: Broadlane has positioned itself as a “cost management company” rather than a GPO or e-commerce company. When did you decide to do that, and why?

Fetter:In 1999, we saw a whole series of players trying to address functions that hospitals needed to perform well. GPOs, distributors, and e-commerce companies were saying, “We’re going to bring an Amazon-type shopping experience to the materials manager.” There were 40 to 50 [of these e-commerce companies]. Coming from Tenet, our perspective was that of hospital operators. The breakthrough concept for us – and this was not rocket science at all – was to form a company that Would bring a package of services to hospitals which, as hospital operators, we felt they needed to maximize their performance.

Greskoviak: We create a single point of accountability. When someone is using a pure GPO, they need to engage other companies to obtain a complete supply chain solution. There’s no integration of services. Because of the complement of services we offer, we have full accountability of the supply chain in our customers’ facilities.

Can you briefly describe the growth of Broadlane over the past two years?

Fetter: On Day One, 22 people joined us from Tenet. Today, we have 270 people. We probably have 40 percent to 50 percent more contracts with manufacturers than we did when we began. Today, Tenet represents only about a third of our business. The watershed event for us was getting the Kaiser Permanente contract in February 2001.

Greskoviak: The whole idea was to use the competencies of shared services that Tenet had offered for its facilities. We went out of our way to document how Tenet had handled supply chain management in its facilities. We simply scaled those competencies to our other clients. We looked at how, when Tenet bought a hospital, they would implement their national portfolio and look at utilization and other cost-reduction opportunities in the facility. We refined that methodology and applied it to our clients.

Because you offer a fairly broad package of services, does the industry have a fuzzy perception of what you are and what you do?

Fetter: I think there may be a bit of that. We’re not in an easily definable box. Do we belong in a GPO box? Not really, though we use group purchasing as a tool. Do we belong in an e-commerce box? No, but we provide the same services as the market leader. Do we belong in a software provider’s box? Not really, but we operate contract management systems and maintain the item master on behalf of the industry’s second largest healthcare provider. And shortly, we’ll do so on behalf of more providers than anyone else. Are we an outsourcer? We’re the industry’s leading [materials management] outsourcing firm.

When you say that Broadlane is the leading materials management outsourcing firm, are you counting the Tenet hospitals?

Fetter: Yes. We manage Tenet’s corporate materials management function on an outsourced basis. [Tenet currently has 115 acute-care hospitals.] It’s a 10-year agreement, which began in 2000. We provide centralized materials management and technology functions, and we are their exclusive contracting party. Our other outsourcing clients are Kaiser Permanente, Continuum Health Partners [in New York] and The Health Alliance of Greater Cincinnati.

How do you market your services?

Fetter: We don’t have any salesmen selling our services. Instead, we have people throughout the country, such as Joe Greskoviak, responsible for client operations. We have divided the country into five regions, each of them under the direction of a managing director.

Who’s your biggest competitor?

Fetter: We compete constantly against the enormous power of the status quo [which finds providers] changing nothing, doing nothing, assuming they can’t perform any better. We are constantly challenging our clients and prospective clients to do more, do it faster, drive more in savings, improve results. The status quo is a very powerful thing, particularly in health care. There’s safety in it.

What’s the biggest problem facing hospital materials management today? And what’s your solution?

Fetter:The biggest problem is that hospitals have put materials management in the basement, even though it’s their second largest category of expense, after labor. It’s a category that can help improve patient care.

Administrators fail to give materials managers the resources they need. I have never seen a hospital system appropriately staffed in materials. They under-invest in systems, and the list goes on and on. A major part of our strategy is to elevate materials management in the eyes of the CEO, CFO and COO, so that it is seen as being vitally important to improving performance.

Must clients use all the services you offer, or can they pick and choose?

Fetter:Nearly every client relationship we have is different. The majority of our clients – and certainly most of the large ones – take advantage of all the services we have to offer. But others, for various reasons, pick and choose one or another of the services. That doesn’t bother us. We don’t think there’s one packaged offering for every type of hospital or hospital system. We believe every hospital is unique, that they exist in unique markets, in unique competitive environments with unique financial considerations.

Greskoviak:We’re hard-pressed to find any provider who uses a national GPO’s contracts to buy more than 50 percent [of their equipment and supplies]. Not all contracts work for every IDN. So we’re saying, let’s be honest about the state of affairs and provide the services we know our customers need. This is not to say that there’s no value in group purchasing. But we think there’s limited value in it. What are the GPOs doing for hospitals beyond the value of contracts? Very little.

For how long do clients typically use your services? Do they sign contracts with you?

Fetter: There’s a misconception about us, that we force all our customers into long-term, exclusive relationships. We have very casual relationships with some clients; they might purchase only one contract from us. Others might purchase capital equipment with us on a one-time basis. The common theme is, it depends on the circumstances of the provider.

Do you object to your customers belonging to other GPOs?

Fetter: Virtually all our annual purchasing volume is from customers who have no other GPO relationships.

Let’s switch gears. How do you define outsourcing?

Fetter: We consider an engagement to be outsourcing only if we employ people who physically work at the client’s site.

How can you provide better materials management support via outsourcing than the client can by having its own materials manager onsite?

Fetter: Materials management is all we do. We put much greater effort in training and knowledge transfer than most hospitals do. We typically don’t take on hospital-level buyers, but rather, corporate materials managers.

What we offer are professional services. We’re more heavily involved in operations [than other companies]. We have 35 employees at Continuum. We’re as much on the hook [to show results] as anyone there.

Greskoviak:Sometimes it’s easier for a third party – who doesn’t have the political baggage in a hospital – to come in and introduce new opportunities. In those instances, we’re welcome resources. And we make it very clear that at the end of the day, physicians remain the sole determiners of the products that are used in the course of patient care. Once we have a firm understanding of clinical preference, we cut the best deal, using the leverage we have.

You’ve talked about the Kaiser contract as being a watershed event for Broadlane. Can you describe that contract?

Fetter: Kaiser already was self-contracting. In making contracting decisions, they were running roughly 60 clinical end-user committees, involving 700 people. Today, we run that process for them. Before we got involved, it took them an average of one year to implement a contract. We’ve reduced that by 70 percent. So, the clinical end users are totally involved. We don’t make purchasing decisions. Rather, we facilitate the process. And we are constantly developing new contracts. For Kaiser, we have developed more than 90 new contracts. That’s a cornerstone of our strategy – customizing contract portfolios for our clients.

Today, GPOs are getting grilled about how much money they make in the form of administrative fees. How does Broadlane get its revenues?

Fetter:We get paid a number of ways. The GPO entity…allows us to aggregate volume, to enter into agreements that provide for administrative fees. In some cases, clients want us to get paid that way. In other cases, clients want to pay us directly. And in still others, we receive savings bonuses from our clients. As we implement savings and drive performance, they pay us a portion of that. In technology, we get paid on the basis of whom we’re delivering service to. So, it’s all over the map. When we started the company, our revenues were 100 percent administrative fees. We’ll end this year with 20 percent of our revenues from sources other than administrative fees.

Why the interest from the start in the electronic piece? Can you talk about the significance of BroadLink™ [Broadlane’s electronic purchasing exchange] to your overall strategy?

Greskoviak: Without having access to good information, you’re practicing reactionary management. If you have access to timely information, you can identify trends, such as over-utilization of products. Or if the client has agreed to undertake standardization, you can quickly see the results of the strategy and adjust accordingly.

Fetter: On a conceptual level, we provide two of the three technology pieces that are most important in materials management. The three are: 1) the ability to capture what you’re purchasing and using your information system to manage the purchasing process; 2) automating the ordering process in order to save time and reduce errors; and 3) operating those two functions in a way that is automated and correctly organized.

We don’t provide a materials management system. But we know that hospitals that buy these systems often fail to use them correctly. So, going back to our operations expertise, we manage their item masters. A hospital of modest size might buy 30,000 to 40,000 different items annually. A seven-hospital system might buy 90,000, and a large multi-hospital chain, 350,000. And they might be using 350 to 500 different contracts to do so. To keep it updated is an incredibly complex job. You need a contract management system.

With BroadLink™, we can automate the ordering process. More than half the products that our core customers purchase are on the system. When e-commerce companies were being formed to provide Amazon-type shopping for medical products, we thought they would create a free-for-all, with too many uncontrolled purchases. So, BroadLink™ provides for point-and-click buying. But, knowing that most hospitals do not want to bypass their materials management systems, we feed the purchasing data into their systems.

So, that’s our take on technology. There are marvelous tools out there. It’s no excuse any longer to say, “I’ll wait until all this is proven.”

Broadlane has done a lot of work contracting for clinical-preference items. Is this an area you’re focusing on?

Fetter: It’s tempting for hospital materials departments to spend an inordinate amount of time on items that are easy to negotiate with vendors – commodities [whose source] physicians don’t really care about. They might spend tremendous effort getting a better deal than their GPOs. Meanwhile, pacemakers are flying through the door at retail. Our view is this: You need to focus your attention on where the opportunity is, in aggregate dollars.

Greskoviak: We don’t create a clinical contracting strategy and then try to impress that on our customers. Instead, we invest to understand each customer’s unique circumstances, preferences and opportunities to standardize among our customers. If we can sign a national contract, good. But to make sure our customers receive the contract coverage they require, we handle higher-level clinical-preference items on a unique basis. We would rather work with our customers, understand their current vendors, evaluate their ability to potentially standardize, and look at innovative contract strategies – and then create a strategy that fits or supports their clinical preferences.