Medical device and supply companies evaluate their emerging e-commerce strategies - Industry Overview

With Internet and computer industry stocks in the tank, medical device makers and distributors are wondering about the future of e-commerce for the health care industry's supply chain.

The most likely answer is that e-commerce will happen, but it probably will evolve more slowly and rationally than e-commerce enthusiasts were predicting less than a year ago. There is no question that important customers and suppliers want to trade online, because e-commerce has the potential to reduce costs, increase profits and boost quality.

Now we know the questions to ask

Medical device companies must answer several strategic questions as they plan enhancements to their e-commerce efforts. How, they're asking, will e-commerce:

* Make sales people more efficient and effective?

* Reduce customer service expenses?

* Build customer relationships?

* Improve customer satisfaction?

* Facilitate in-service training?

* Provide customer feedback?

* Benefit direct manufacturers?

* Benefit manufacturers selling through distributors?

* Affect sales prices?

* Comply with the privacy and security requirements of Health Insurance Portability and Accountability Act of 1996 (PL 104-191)?

Big players are making big Internet investments

One thing is clear--the industry's largest manufacturers and distributors are making big investments in their e-commerce efforts, and both Novation and Premier are committed to major e-commerce contracts and investments. The same goes for the leading hospital chains. Physicians' offices are much less committed.

Another question is pretty well answered. That is, it takes a big investment and major players to be effective in e-commerce, which is why leading suppliers are investing in Global Healthcare Exchange (GHX), which will be a major e-exchange for the health care field.

E-commerce will make sales people and marketing more efficient and effective by reducing the time it takes to educate prospects and customers about new and existing products and services. Most important, when customers order online from purchasing departments or nursing stations, transaction costs will drop while order entry accuracy will improve. Transaction costs savings will help companies selling directly to end users more than those selling through distributors.

Marketing and sales costs should go down regardless of whether a company is selling directly to end users.

What is not known is what percentage of prospects and customers will use the Internet to obtain information about products and services. An Institute of Medicine Study released late in 1999 estimates that 35% of patients are empowered consumers. That is they seek information that helps them make decisions about their health care. The average education of health care workers is far above that of the general public, which suggests that, if they have the time, a larger percentage of medical device buyers will search the Web and suppliers' Web sites for information. And, if authorized by their institutions, they will buy online rather than go through a purchasing agent or salesperson.

Buyers and sellers will pay their e-commerce costs

Because customers can go online 24 hours a day, seven days a week, a well-organized e-commerce effort should help reduce customer service budgets. The trick here is to create a customer service site that answers the most technical questions, not just frequently asked questions. At this point, it is difficult to see how a supplier can eliminate service calls and telephone support, but those expenses should also go down. Each company will have to determine whether the cost of service calls on telephone support will drop enough to cover the cost of the online customer relationship management (CRM).

Hospitals, especially, will reduce their supply chain costs significantly after they authorize their employees to take full advantage of the technology. They, too, are making big investments in Internet and electronic data interchange (EDI) technology above and beyond what they've been using for years.

Some, if not many, marketers seem to think that if e-commerce saves money for buyers, they should pay the cost of e-commerce, not the suppliers. Don't count on it. Because most suppliers will reap huge rewards from e-commerce, they will give customers incentives to use the Internet. Few will charge customers to do business online, and those that try probably will only offend those customers. So, if a supplier doesn't expect its e-commerce and Web site investments to pay off, it most likely will scale back its investment to where it does become profitable, or at least breaks even.

Relationships with customers, of course, are critical. And e-commerce will help enhance customer relationships. For example, a current and content-rich Web site will present a company's best face to the world, complementing personal sales calls and face-to-face contacts at trade shows. Customers, such as radiologists, who closely follow their major suppliers, will be able to learn about new products and upgrades via the suppliers' Web sites and e-mails. These will be much more complete and much quicker than sales calls and mailings, which will continue but often take days or weeks to complete after a new product introduction or upgrade is announced.

E-commerce builds customer satisfaction

It follows, then, that customer satisfaction and customer retention will increase for companies with solid Web sites and e-commerce services. Just as employees and patients are happiest when they feel and believe they have control over their lives and environments, customers are happiest when they know that they can obtain product, service, inventory, order status and account information on their computers when they need it. Whatever you might think about Amazon.com, there is no question that it has won a following by making it easy for customers to do business. And it has set a standard that other business-to-consumer and business-to-business sellers must meet.

In medicine and health care in general, end users of everything from drugs to patient monitors and IV administration sets expect in-service training. People learn by doing under the watchful eyes of trainers and mentors. For some products and services, no computer screen or document will replace a tutorial, class or other personal in-service. Video training has been around a long time and has been used, for the most part, to complement manuals and personal in-service training. Such videos are being put on the Internet, where they can be accessed as needed without the frustrations presented by a VCR. The technology is in its early stages, but as broadband capacity expands, it will become a very important training tool.

At the same time, of course, highly sophisticated graphics software will allow suppliers to offer interactive training and self-administered testing and credentialing over the Internet.

Internet will Increase in-service effectiveness

Such tools will not only reduce in-service training costs for suppliers and customers, but also will increase its effectiveness. It also will make it easier for manufacturers and institutions to test end users' comprehension of their training and to document such training. A nurse, for example, may be trained to use a device in one hospital and to document such training to a future employer by referring a new employer to his or her personal credentials database, which will be maintained by the manufacturer of the device. This will reduce training costs. And a manufacturer that can document that a large number of people in a specific geographic area are trained to use a specific product will find it is easier to sell that product to a new customer.

At the same time, it must be recognized that while numerous colleges and universities are marketing online courses, the effectiveness of on-line training remains to be seen. Not everyone, for example, learns by reading. Americans are taught to be taught, not to teach themselves by reading or experimenting with a new device. Even very bright surgeons like to have salespeople or in-service trainers in the operating room with them when they are using a new medical device. Online courses will never replace that kind of training.

The Web makes it easier to get customer feedback

Market research and customer satisfaction studies are important sales and marketing tools and are critical to successful new product development.

The beauty of the Internet and e-commerce is that it is relatively easy to get a feel for the market just by watching traffic patterns on a Web site. If a lot of users are going to a particular page, reading a particular article, ordering a product or searching for one or more related key words, a market analyst will see the pattern.

One way to evaluate a feature on a Web site is to offer a mini-questionnaire at the end of a product description, search or ordering process. Many sites offer users an opportunity to e-mail questions and comments about the site, products or services. It is important to respond to such e-mails within 24 hours.

Another way to get customer feedback is to sponsor an online users' group, listserve or discussion forum on the site or independent of the main Web site. And there is nothing to stop a supplier from e-mailing a market or customer satisfaction survey to customers. A major advantage of conducting surveys of customers on the Web is that response is almost instantaneous, results can be computed on the fly, and researchers can conduct immediate or periodic followup surveys of respondents to the first survey.

Companies selling directly to end users will use the Internet to shorten selling cycles, reduce transaction costs, establish better communications with customers, improve customer satisfaction and increase sales and profits.

Manufacturers selling through distributors will use e-commerce to reduce their own purchasing costs, improve communications with distributors and establish more direct communications with end users.

Regardless of whether users buy from manufacturers or distributors, e-commerce will make it easier and more cost-effective for institutions to implement just-in-time and stockless purchasing programs. E-commerce and information systems upgrades that will be required under HIPAA make all providers much more computerized and wired to the outside world.

When the Internet and e-commerce came out of nowhere four or five years ago, a major assumption was that buyers would use e-commerce to exact price concessions from suppliers. Forecasters predicted that better informed buyers will be better purchasers, and they will force sellers to bid prices lower. That, generally, is how markets work.

In health care, however, there are many buyers and a small number of sellers of any one category of products. This reduces competition. GPOs sign three- to seven-year contracts for most high dollar volume product categories, further reducing open market price competition in those market niches. Therefore, the Internet may have less of an impact on sales prices of medical devices and supplies than in other industries. Indeed, effective Web sites may stimulate stronger demand for some companies' products, allowing the sellers to charge higher prices than they would otherwise.

HIPAA may speed use of e-commerce

HIPAA looms as an expensive regulation that currently is due to become fully effective in two years. But the Bush Administration is showing signs it may bow to pressures from the hospital and insurance industries and delay the effective date by one or two years.

Regardless of when HIPAA's privacy, security, transaction and related regulations become effective, hospitals, nursing homes, medical groups and health care chains of all kinds will be investing in systems that make their Internet and e-health ventures secure and so-called HIPAA compliant.

This means hospitals and physicians will have secure Internet and e-health systems sooner than later, which will make it easier for them to implement e-commerce. They will be better able to authorize individuals to order products online, and, using thumbprint and facial imaging technology, by 2003 or 2004 will be able to document who makes each transaction.

No one really knows what it will cost providers to comply with HIPAA. Only 20% to 30% of the cost will involve computer software and hardware. The balance will involve implementing corporate change and new privacy and security processes. The American Hospital Assn. (see www.aha.org for HIPAA links) says $22.4 billion and the American Medical Assn. says $40 billion; some say as little as $4 billion. Whatever the cost, it will be passed on to insurers, employers and workers as an indirect tax. And it will give providers another financial incentive to use e-commerce to reduce supply chain costs.

Whatever the cost, suppliers stand to benefit from HIPAA, although as buyers of health insurance for their employees, it will be a pain.

Today, only 10% to 15% of hospitals and 3% to 4% of physicians use the Internet extensively to buy medical supplies and devices. More are researching products and medical issues online, while some 75% of Web users have searched the Internet for medical advice and information.

Clearly, there is still time for the industry to develop e-commerce strategies that fit individual market niches and the buying habits of their customers. Most e-commerce strategies and Web sites already are in their second or third versions, and more will come as each company experiments and feels its way into the electronic commerce era.

Donald E. L. Johnson is publisher of Health Industry Today and Hospital Materials Management. He has been covering the supply chain and materials management story for more than 35 years. He has been writing about health care suppliers and buyers since 1976. HIT and HMM soon will be available on the Internet at www.businessword.com.

COPYRIGHT 2001 J.B. Lippincott Company
COPYRIGHT 2001 Gale Group