Executive Interview: King of the Hill

Making it Stick
Following the completion of its acquisition of Neoforma in March 2006, GHX may be the kingpin of healthcare exchanges. But CEO Mike Mahoney doesn’t have much time for gloating.

In March 2000, e-commerce was the rage. Money from venture capitalists flowed freely. Dot-com companies were marketing heavily to providers and suppliers alike, in an effort to set up the ultimate healthcare exchange. JHC readers might remember some of these names: Cimtek Medical, Promedix, Medibuy, Neoforma, Empacthealth, Embion, Medsite, the New Health Exchange.

But beneath the euphoria and hubbub lay a lot of angst. Manufacturer sales and marketing executives were receiving calls from guys they never heard of, who wanted to sell their products on the Internet. If this was to become the next big thing, manufacturers wanted to be part of it. But they also worried about disrupting the relationships they had cultivated for years with their distributors.

Distributors, meanwhile, fretted over the “D” word – disintermediation. They feared that manufacturers would sidestep them and sell the products directly to providers over the Internet. They were too nervous to notice that few if any of the dot-com companies had any inclination at all to build warehouses and put “feet on the street” to sell products.

For their part, IDN contracting professionals scratched their heads as the number of exchanges multiplied – and as their colleagues accepted potentially lucrative positions with them.

It was in this mileu – or free-for-all – that a group of five manufacturers (GE Medical Systems, Johnson & Johnson Healthcare Systems, Baxter Healthcare Corp., Abbott Laboratories and Medtronic Inc.) created the Global Healthcare Exchange in March 2000. At the time, it was perceived as the manufacturers’ bid to control e-commerce. (In fact, one month later, four of the country’s biggest distributors and wholesalers – AmeriSource, Cardinal, Fisher Scientific and McKessonHBOC – created their own exchange, called the New Health Exchange.)

The GHX board selected one of its own – Mike Mahoney, an 11-year veteran of GE Medical Systems – to serve as general manager, working out of temporary offices in Chicago. His last job prior to joining GHX had been that of general manager of GE Medical’s Integrated Imaging Solutions Business.

Mahoney had a big job on his hands. He had many masters to please, and he was under pressure to show results quickly, lest GHX lose more ground to its better-established competitors.

From the beginning, Mahoney and the GHX team understood that providers would benefit by the ability to buy products from multiple suppliers through one exchange, as opposed to placing orders via phone, fax or electronic data interchange (which requires separate connections with individual suppliers). But they also believed that providers and suppliers could derive even greater benefits through so-called “data synchronization,” that is, the flow among all supply chain partners of uniform, accurate data – with an emphasis on “uniform” and “accurate.” They were talking not just about product data, but data about pricing, order status, inventory levels, etc.

The concept wasn’t novel. In fact, the drawbacks of the disconnects of the supply chain had been demonstrated four years earlier in the much-publicized Efficient Healthcare Consumer Response (EHCR).

In November 1996, the EHCR sponsors – the Health Industry Distributors Association, the American Society for Healthcare Materials Management (now the Association for Healthcare Resource & Materials Management), Health Industry Business Communications Council, National Wholesale Druggists’ Association and Uniform Code Council – claimed that $11 billion of supply chain costs were actually “avoidable process costs.”

Through efficient product movement, efficient order management and efficient information-sharing, supply chain partners could trim that much money from the U.S. healthcare system’s bill, according to EHCR’s authors. Advances in information technology and the Internet seemed to bring the promise within reach.

GHX’s mission statement picked up where EHCR left off: “To create a fully connected and efficient healthcare supply chain: streamlining the purchasing process, leveraging accurate product information and maximizing connectivity between trading partners through an open and neutral exchange, resulting in cost savings for all participants.”

With the March 2006 acquisition of Neoforma from Novation, GHX now connects about 2,500 U.S. hospitals and 800 non-acute-care facilities with approximately 200 suppliers – or about 34,000 trading partner connections. GHX has developed connections to approximately 30 of the most commonly used materials management information systems, including Lawson, PeopleSoft and Meditech.

The company’s AllSource® product catalog allows suppliers to post updated information about their products, against which providers can maintain the accuracy of their item masters. AllSource contains information on approximately 2.3 million products, representing 85 percent of the medical and surgical products purchased regularly by U.S. hospitals today, says GHX. The number of suppliers publishing Universal Product Numbers for their products has increased fifteen-fold in the past two years, according to the company. GHX reports that hospitals that have used the data in AllSource to cleanse their product item masters have, on average, reduced discrepancies between purchase orders and purchase order acknowledgements by 25 to 50 percent, and cut in half the time spent by purchasing and accounts payable staff resolving order exceptions.

The Journal of Healthcare Contracting: Has the term “e-commerce” fallen out of favor? If so, what’s the term of choice to denote electronic transactions among healthcare trading partners?

Mike Mahoney: GHX prefers to be promoted as a supply chain services company. E-commerce is the root of GHX in terms of automating connectivity, but we have a number of [other] services in the supply chain area.

JHC: How has e-commerce changed since GHX was formed in 2000? Has that change taken GHX in any surprising or unexpected directions?

Mahoney: In 2000, we were owned and supported by five major manufacturers. Since then, we have diversified our ownership base to about 20, spanning hospitals, GPOs, manufacturers and distributors. We have led the marketplace consolidation, and that has driven usage. Approximately 3,000 hospitals and about 200 supplier divisions use GHX today.

JHC: Back in 2000, did you know what it would take to succeed?

Mahoney: There were too many companies looking at the exchange model. As a result, there was a lack of significant adoption by customers. The consolidation – in which we merged with Medibuy and then Neoforma – escalated customer adoption [and the development of] our products and services. We also took out a tremendous amount of operating cost among the competing exchanges.

JHC: The original press about e-commerce was the ease of ordering products through the Internet. But today, your Web site talks as much about data synchronization as the Internet. Why is that?

Mahoney: Studies show that $5 to $7 billion of supply chain losses are due to lack of data synchronization. From the beginning, we have focused on data accuracy as part of the process. Today, suppliers publish information to the AllSource catalog on a frequent basis. AllSource is the heartbeat of the exchange. Hospitals cleanse their item masters (and GHX provides those cleansing services), and when using the exchange, they leverage the catalog to ensure that accurate ordering is taking place. This improves the productivity of the hospital [and supplier].

On the hospital side, [data synchronization and accuracy leads to] more staff productivity. Buyers deal with less rework and fewer discrepancies. We have seen a 40 to 50 percent improvement in performance, partly because fewer discrepancies have to be chased. Accounts payable teams are more effective, because they’re dealing with electronic orders. And technology teams maintain and support just one connection with GHX vs. separate connections with a number of suppliers.

On the supplier side, we see benefits as well. First, suppliers don’t have to maintain a large EDI structure. Second, their customer service teams benefit by receiving electronic orders. Third, they get more accurate information because of our data cleansing services and accuracy in ordering; so they are enjoying the downstream benefit of improved invoice accuracy.

JHC: Has it been difficult to bring GHX to the point it is today?

Mahoney: Yes, but now we’re in a position to leverage the benefits. [As I said], there were many competing exchanges when we started, and that drove a lot of confusion. In addition, we faced a fragmented IT [landscape in hospitals]. And we had to deal with the lack of data standardization and synchronization.

But we have made significant progress. We have led consolidation in the industry. We’ve integrated our exchange with close to 3,000 facilities, so our team has gotten very good at integrating the exchange into hospital systems [as well as those of suppliers]. Regarding data synchronization, we have 2.3 million items in our catalog now.

JHC: On a scale of 1 to 10, where 1 is nil and 10 is very high, how far is the healthcare industry in terms of exploiting the value of e-commerce?

Mahoney: I’d say we’re about a 4. We have worked hard on the foundation for the past four to five years, and many of the key pieces are in place. Now we’re in a position to expand. Our transaction volume virtually doubles each year. We average about 30,000 purchase orders a day. And with Contract Center, hospitals can preview, view and filter an actual contract into their materials system; they can get price validation to ensure the contract price is actually being used when they transact business.

JHC: In the past, manufacturers have grumbled that in order to participate in certain GPOs’ contracts, they had to participate in an electronic exchange, and pay a fee to do so. What’s the situation today?

Mahoney: Today, our owners include VHA, HealthTrust Purchasing Group, Premier, University HealthSystem Consortium, and a number of manufacturers and distributors No owner has more than 14 percent share in the company. Hospitals, GPOs and manufacturers all support it. Once a hospital is live, they want to drive as much utilization as possible. The same is true with suppliers. We charge suppliers an annual subscription fee, and we encourage them to connect with as many hospitals as possible.

JHC: How far is the industry toward adopting a universal product number system?

Mahoney: We believe that, given our ownership base and the consolidation that has occurred, GHX can play a much bigger role in the future enabling standards. Part of the problem – and it’s the same problem GHX faced early on – is fragmentation in the industry. Unlike the retail industry, healthcare doesn’t have one big player that can drive a standard. Instead, hospital systems are fragmented. We want to create a standards council made up of leading manufacturers, distributors, hospitals and GPOs, which would focus on hospital and product identifiers, to begin with.

JHC: What other obstacles must the industry overcome to adhere to standards?

Mahoney: The healthcare infrastructure is [an obstacle]. Just look at a large, diversified manufacturer with multiple operating divisions, each using a separate numbering system. So complexity in just one manufacturer is difficult to manage.

[Adherence to standards] won’t occur in the second half of 2006. But we think if we can bring the right players to the table, consistent with the ownership of our company, we can begin to build a greater participant and enablement path.

JHC: It’s been said that manufacturers have dragged their feet when it comes to UPNs, because they don’t want to make it easy for providers to compare prices. Have you found this to be the case? Can GHX play a role in resolving the issue?

Mahoney: We’ve seen a 40 to 50 percent increase in the usage of universal product numbers in the AllSource catalog. A number of larger manufacturers are moving to UPNs for their entire product catalog. And progressive systems are electronically trading using UPNs.

JHC: David Brailer resigned recently as national coordinator for healthcare information technology. How would you gauge the success of the Office of the National Coordinator for Health Information Technology, whose stated mission is this: “To provide leadership for the development and nationwide implementation of an interoperable health information technology infrastructure to improve the quality and efficiency of healthcare and the ability of consumers to manage their care and safety?”

Mahoney: The initial focus of Brailer was the electronic health record. Our services are not clinical in nature, and we have haven’t been in the top tier of the priority list. But we’re active board members of the National Alliance for Health Information Technology, which has been very active with David Brailer’s team.

If you look at the dollar-saving potential of automating the supply chain, it’s a huge figure. [The Office of the National Coordinator for Health Information Technology] did a heck of a job getting health information technology on the radar. We’ll continue to press forward with the supply chain portion of it.

JHC: What future products and services is GHX contemplating?

Mahoney: Contract Center is one. We’re working on electronic letters of commitment. We’re doing a lot in the business intelligence area. [GHX inherited HPIS Market Intelligence™ through its acquisition of Neoforma. HPIS collects sales information from major distributors and sells market-share reports.] And we’re moving into connecting more of the pharma [industry]. We acquired a company [Ideal Systems Inc., Blue Bell, Pa.] that provides claims validation software for pharma manufacturers [to help calculate rebates due pharmacy benefit managers]. And we’re providing pharma market share reports [to manufacturers] and contract management analyses [to providers], so they can tell what’s been purchased on and off contract.

JHC: With GHX rolling out various tools to help contracting professionals identify costs, what support is being given to your field reps to better help them understand the tools and how to roll out the tools to providers?

Mahoney: We have invested significantly in a professional services organization, which goes onsite to the hospital to work with managers, buyers, accounts payable teams and others, to train them on our solutions.

JHC: What can you tell customers to assure them you’ll be around for the long haul? Does GHX have any plans to go public?

Mahoney: Companies need to be profitable to be sustainable for the long haul. GHX is profitable, and we’re using those profits to invest in the services we have talked about. There are no plans to take the company public. We will continue to be focused on the healthcare market, as a private entity. Hopefully we will [continue] to evolve into a leading supply chain services company.

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