McKesson's E-Health Gambit

Medical-supplies distributor takes advantage of the health-care industry's increasing reliance on I.T., adding software and services to drugs and stents
The initiatives also could be good business for McKesson. Pure says IT services and other tech products are "one of the fastest-growing areas of the company"--though its core drug-distribution business is growing faster. The company is betting that federal regulations will spur even more growth in the next decade. Through technology-related acquisitions and some corporate reconfiguring, McKesson has been building up its technology development and its consulting business.

McKesson's tech division is still a relatively small part of its overall business: $1.4 billion in sales for the company's 2005 fiscal year, which ended March 31, with 8% annual growth. McKesson formed the business last year by combining its IT consulting business with a unit that sells nursing carts, medication cabinets, and drug-dispensing robots. McKesson's overall revenue rose 16%, though the company lost $156.7 million, partly because of legal charges for settling a class-action suit against a software company McKesson acquired. On May 13, McKesson disclosed that the Federal Trade Commission is investigating whether the company engaged in anticompetitive practices with other drug wholesalers by trying to limit competition.

McKesson's expansion into tech products poses new risks, as well. Analysts say McKesson's IT initiatives are broadening its product portfolio, but also the scope of competition. Mike Davis, executive VP at HIMSS Analytics, the research and consulting arm of industry organization Healthcare Information and Management Systems Society, says in an E-mail that McKesson's acquisitions in areas such as digital medical imaging have put the company into competition with global companies such as General Electric, Siemens, and Fujitsu. It also competes with medical products and drug distributor Cardinal Health. In the electronic medical records market, Davis calls McKesson's Horizon software line a "very competitive product" and says the software's ability to run on Linux gives McKesson "a significant cost advantage over other competitors."

It might take more than clever software, though, to change an industry that's both cash-strapped and steeped in traditional ways of handling work and patient care. To help its health-care customers in the transformation, McKesson emphasizes speed of technology implementation and costs. Rather than replace the systems, robots, and technical equipment a hospital already owns, McKesson tries to build its IT around what's already there, Pure says. "Our job is to help customers get value in an accelerated fashion," she says.

In addition, McKesson's high-tech products and services help make the process of dispensing drugs safer and more efficient, which could boost its bread-and-butter business of distributing drugs and supplies. A ruling last year by the Food and Drug Administration mandated that bar-code labels--already standard on over-the-counter drugs--also be featured by next year on all medications, intravenous drugs, and blood products used in hospitals.

McKesson says it packages 155 million bar-coded doses of medicine each year and that its customers scan more than 44 million doses at bedsides annually. Computerized alerts to hospitals could help prevent an estimated 56,000 weekly medication errors, the company says. Before the FDA ruling, hospitals that used bedside bar-coded drugs often needed to have their pharmacies add the bar codes to medicines, or ask their drug distributors to package them that way. The rule stops short of requiring hospitals to buy computer systems that scan and read bar codes but could make it cheaper for hospitals to adopt those technologies because of standardization.

Some hospitals are even starting to use radio-frequency identification tags to track medical equipment and patients. To keep pace, McKesson is rolling out RFID products--literally. Earlier this year, the company released CarePoint-RN, a new mobile nursing cart co-developed with Rubbermaid that's outfitted with an RFID tag for easy tracking. The cart also features a wireless PC, bar-code equipment, and medication storage.

For hospitals and health maintenance organizations already undergoing big regulatory and practical changes, McKesson also is trying to provide business guidance. Pure holds quarterly meetings with key customers' CEOs and chief operating officers, which have been a "huge" benefit, says Ben Clark, CIO at Centra Health, which operates several nursing homes and hospitals in Virginia. Centra is spending $23 million with McKesson over five years to try to transform itself into a wireless, paperless environment. So far, the project has been "on time and on budget," and the first clinical apps are scheduled to go live in October. "When we do have issues," Clark says, "we're talking to the person who can bring change."