Abbott Laboratories, Baxter International Inc. and three other of the world’s biggest medical-product makers said Wednesday they will create an Internet-based commerce exchange that could eliminate billions of dollars in wasteful health-care spending by hospitals.
The worldwide exchange, which will be a separate, privately held company based in Chicago, will try to improve the often onerous and time-consuming process medical-care providers endure when they order everything from bed pans and rubber gloves to magnetic resonance imaging equipment.
Manufacturers say they also hope to upgrade the care patients receive by sharing clinical information on a “real-time basis” with clinicians who operate the equipment and use the supplies.
Joining North Chicago-based Abbott and Deerfield-based Baxter are Johnson & Johnson of New Brunswick, N.J., Medtronic Inc. of Minneapolis, and General Electric Co.’s Milwaukee-based GE Medical Systems. The companies, which sell products to more than 90 percent of the hospitals around the world, could potentially route tens of billions of dollars in health-care supplies and equipment through the exchange.
The companies would not give an estimate of potential savings to providers of medical care, but industry reports say the $83 billion spent by hospitals in the U.S. alone could be reduced by $11 billion through improved business practices.
“If you look at the total supply chain costs, it’s pretty amazing it operates given all the inefficiencies,” said Baxter Chief Executive Harry Kraemer in a telephone interview from the New York Stock Exchange, where the venture was announced.
Indeed, the health-care industry joins automakers and retailers as the latest segment of the economy looking to e-commerce as a way to improve operations. But health-care firms may be the most in need when it comes to improving efficiencies.
A typical hospital, for example, spends nearly 40 percent of the cost of goods “on moving and handling supplies, compared to less than 10 percent for most industries,” according to a report last month from the Chicago-based American Hospital Association’s Health Forum Journal.
The exchange will offer the ability to order and obtain delivery status on-line, thus reducing phone calls, faxes and the need for the multitude of cumbersome catalogs doctors and hospitals now use to order most medical products.
“This new on-line exchange has the potential of dramatically reducing the number of technology systems that we currently need to procure and purchase products, and providing access to accurate and timely information,” said William Donelan, executive vice president of Duke University Health System.
The health-product exchange follows other e-commerce ventures by retailers including Sears, Roebuck and Co. and the Big Three automakers to enhance the “business to business” sector on the Internet.
In the case of the five health-care companies, Abbott, Baxter and their partners say they are working together to make the purchasing process more efficient.
“Today, our customers have to contend with proprietary ordering systems that differ from one company to another,” said Abbott Chief Executive Miles White. “The exchange will vastly simplify the procurement process.”
The companies, however, are sensitive to antitrust issues because of regulatory scrutiny facing the automakers. Antitrust laws prohibit concerted action by rival companies to fix prices, and some regulators worry that the new sales and supply networks will give companies a forum to communicate in subtle ways to set prices at artificially high levels.
The health-care product manufacturers say they will keep pricing contracts and related negotiations with customers separate to avoid such problems. “It’s not the intent for the exchange to be a negotiating body,” Abbott’s White said. “This is to create customer value, not market value.”
Still, the exchange is expected to draw attention from the Federal Trade Commission.
“The FTC will give all the deals close scrutiny, but these business-to-business arrangements almost certainly pass antitrust muster,” said Hillard Sterling, a partner specializing in antitrust and information technology cases at Chicago-based law firm Gordon & Glickson. “Without price-fixing or improper collaboration, there’s just no basis to claim antitrust illegality.”
The Internet exchange may actually increase competition, Sterling said.
“These [business to business Internet exchanges] will lower prices and enhance competition, which is the central focus of antitrust law,” Sterling said.
Although the companies would not discuss pricing issues or a specific amount of their own projected savings, they may see opportunities for improving their operations and enhancing their bottom lines.
Each company expects to save tens of millions of its own expenses annually, largely from freeing up time salespeople spend sending faxes and making phone calls to customers.
“We might now have salespeople spending 60 to 70 percent of their time expediting orders rather than selling,” White said.
Despite an expected decline in manpower needed in the future, the firms ruled out job cuts. “There will be no layoffs,” White said.
Each company will deploy a number of workers at the Chicago exchange and is likely to hire an undetermined amount of additional workers. A chief executive and name for the exchange could be announced in coming weeks.
The exchange is expected to be operational for U.S. customers in the third quarter before expanding globally sometime next year.
The venture will receive technology support from GE’s GE Global Exchange Services and Ariba Inc., International Business Machines Corp. and i2 Technologies Inc.
