Medical Center And IT Vendor Revamp Health-Care Industry Purchasing Models

The University of Pittsburgh Medical Center, which over the last few years has launched or invested in several joint ventures focused on health-care technologies, has teamed up with the decision support software vendor CombineNet Inc. to create a new company that provides computerized sourcing services to the health-care sector.

Initially, the new company, CombineMed, is focused on electronically connecting suppliers of medical and surgical equipment and pharmaceutical to make complex and creative bids to hospitals and other health-care providers that need to purchase those supplies.

CombineMed could eventually expand the offering of its Expressive Commerce platform to other health care areas, such as providing an electronic vehicle to help health insurers bid their benefit plans to employers, says Chuck Bogosta, managing director of UPMC's office of Strategic Business Initiatives.

"Health care on the purchasing side is behind other industries in using technology" to help optimize the sourcing of products and supplies, says Bogosta. That's in part because health care supply purchases are "extraordinarily complex" and are frequently driven by factors such as a physician's preference for a surgical instrument with a special handle.

The new Expressive Commerce sourcing model, which CombineMed is productizing and will make available for other hospitals and health-care providers to use for their supply purchasing, provides the ability for suppliers to offer "more creative" sealed bids, including those that could help hospitals identify more cost-effective and options to preferred products, such as alternatives to the physician's favorite surgical tool, Bogosta says. Of course, physicians' purchasing managers would present the information about the options to doctors before making those alternative purchases, he says.

The Expressive Commerce computerized sourcing model offers more flexibility than "reverse auctions" for suppliers to make innovative bids, Bogosta says.

Reverse auctions cannot support the complexity of what's involved in health care purchasing, says CombineMed president Tom Finn, who was formerly executive VP at CombineNet. Through Expressive Commerce, suppliers can include in multiple bids conditions or constraints, such as market-share based discounts, rebates, and differing payment terms. "Suppliers can express what they can do for a client in the most efficient way," says Finn, such as bids that combine packages of surgical, medical and pharmaceutical supplies, or other alternative bids with various conditions.

The technology also provides buyers—like hospital purchasing managers—with tools to analyze the bids and help them identify the proposals that best meet hospital goals such as cost savings and improved value, says Finn. Expressive Commerce can ultimately help hospitals "redesign the supply chains," Finn says.

Bogosta says group purchase organizations—those that sell volumes of health-care supplies at discounted prices to groups of hospitals and health-care providers—most likely would be the types of companies that view CombineMed's offering as competitive to theirs, he says. Under the Expressive Commerce model, health-care providers and hospitals would purchase the supplies "direct from manufacturers, whenever possible," Bogosta says.

UPMC itself plans to purchase the bulk of its pharmaceutical, surgical and medical supplies for 2006 through CombineMed during an Expressive Commerce "inaugural event" that will take place in late January. Two other hospitals not affiliated with UPMC have also signed up to participate in the inaugural event in January. Those hospitals are Charleston Area Medical Center in Charleston, W.V., and Northwest Hospital and Medical Center in Seattle. Together with UPMC, the three health-care providers are expected to purchase about $1 billion in supplies for 2006 using the new system. The inaugural event will include more than 100 suppliers bidding more than 44,000 supply items.

UPMC, which purchases nearly $1 billion in supplies annually, expects to see a return on its $2 million investment in CombineMed quickly, says Bogosta. UPMC already tested the Expressive Commerce platform twice, including last fall to purchase cell phones and last summer to purchase $25 million worth of drug supplies.

UPMC's "risk mitigation" strategy is that "it makes sense to invest in a company we can use internally" to improve UPMC's own operations or services, he says. "If it's relevant to health care, we look at it," he says. Until this new sourcing venture, most of UPMC's previous technology-related joint ventures have been limited to new drugs and medical devices.

IBM has also expressed interest in possibly investing in CombineMed, says Bogosta. IBM is partnering with UPMC in an unrelated multi-million-dollar joint-technology venture inked last year to sell to the health-care industry co-developed technology services and product related to biosecurity, cancer research and electronic health records. CombineNet and UPMC are splitting revenue generated by Pittsburgh-based CombineMed "fifty-fifty," Bogosta says. Revenue will be generated through a "gain share basis," in which CombineMed will be paid a percentage of the actual savings hospitals get through using their system, says Finn.

CombineNet's sourcing technologies and services are already used in other industries, including transportation, retail, and consumer goods. Expressive Commerce has a modified version of the user interface of CombineNet's offering to those other industries to account for the nuances and complexity of health-care purchasing, says Finn.