OMNICELL DEPLOYS COMMERCE ONE'S E-PROCUREMENT
PLATFORM AS ANTIDOTE TO RISING HEALTHCARE COSTS

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Preface

In the healthcare industry, cost concerns are never far from executives' minds. Hospitals are continually challenged to maintain the quality of patient care while reducing operating costs. It is becoming increasingly clear that materials purchasing provides the greatest opportunity for healthcare providers to reduce costs. Aberdeen research indicates that healthcare facilities spend 44% of revenues on capital goods, operational resources, and contracted services. Any reductions in these purchasing costs can directly improve profits.

To contain costs, hospitals have traditionally tried to complete all of their purchasing through large-scale contracts, often with group purchasing organizations (GPOs) that leverage large volumes for lower prices. However, in the healthcare industry, non-price factors, such as product quality and time- sensitivity issues, are of equal if not greater importance than price alone.

Furthermore, consolidation in the healthcare industry has left networks of facilities with dozens of different back-end systems. These disparate applications make it difficult for hospitals to locate and collect the information necessary to effectively understand spending patterns and to aggregate purchasing volumes across newly merged institutions.

However, Aberdeen research has shown that electronic procurement (e-Procure-ment) systems can improve the healthcare industry's purchasing situation by decreasing product delivery times, by enforcing contract spending, and by providing the visibility into the spending and demand information that improves contract negotiation leverage with suppliers. These benefits can lower both the costs to administer purchases and the prices paid for goods overall.

Omnicell, Inc., a healthcare supply chain solution provider, is tackling healthcare's purchasing challenges with a version of Commerce One's e-Procurement solution, which is customized specifically for the healthcare industry. With early successes in hospitals and healthcare networks, Omnicell is demonstrating significant results in terms of improving overall employee efficiency and morale, increasing contract compliance, and decreasing order delivery times and product prices.

In this OnSite Profile, Aberdeen details Omnicell's supply chain approach for the healthcare industry, its selection criteria for choosing Commerce One technologies to deliver its customized e-Procurement solutions, and the benefits that these e-Procurement technologies are generating for the largest privately held hospital group in the United States.

Healthcare Ñ in Critical Condition

The U.S. healthcare industry encompasses over 7,000 hospitals and 150,000 physician offices, representing $1.3 trillion, or 14% of the gross domestic product (GDP). Operating supplies and pharmaceuticals constitute $125 billion of this spend.

In spite of such huge budgets, healthcare institutions are constantly under pressure to contain costs and to serve more people with fewer resources, as health insurance providers use their muscle to keep service prices down. As part of their efforts to minimize costs, healthcare institutions rely heavily on purchasing contracts, with a majority of goods purchased for hospitals and other care facilities bought through preferred vendors. However, "maverick" (i.e., off-contract) spending still happens in healthcare at an average rate of 15%. For example, a doctor or department might choose to buy special catheters for a cardiac lab directly from a sales representative, instead of going through the appropriate purchasing channels.

Further complicating matters, this hospital might already have a contract covering catheters, but when the lab circumvented the system and ordered the product directly, the materials managers had no information on the purchase. As a result, the materials management executives responsible for buying and supplier management have little visibility into these expenditures, limiting their ability to control spending and reducing their leverage with suppliers in future negotiations.

"Information in the healthcare industry could be improved," explains Wendy Werblin, Director of Product Marketing for Omnicell. "None of it is integrated, as most contracts are done on paper. Hospital A has its contract in one file cabinet, while Hospital B has its contract in another. They think they are buying on contract, but they just don't know."

As healthcare companies try to make sense of where their money goes, they have been limited by their manual purchasing approval processes and paper contracts. They also receive limited information from self-reporting facilities. Healthcare institutions are beginning to see the value of e-Procurement applications to streamline their purchasing processes and to give them better spending visibility.

Omnicell Drives Procurement Optimization

Omnicell was founded in 1992 to help healthcare organizations with materials management and supply chain optimization. Based in Palo Alto, CA, Omnicell first delivered "smart" cabinet solutions for automated healthcare supply and pharmacy product dispensing.

In 1999, the company added OmniBuyer, a Web-based procurement application that allows healthcare facilities to purchase supplies online. OmniBuyer is essentially Commerce One's Enterprise Buyer and MarketSite applications customized for the healthcare industry and offered as a hosted service
(Figure 1).

Figure 1: OmniBuyer Builds on Commerce One Capabilities

Source: Aberdeen Group, December 2001

Commerce One Enterprise Buyer pushes product selection and order initiation to the desktops of frontline employees. At the same time, it maintains the organization's trade agreements, workflow, and business rules. The solution automates requisition and purchase order (PO) generation; manages approval routing and workflow; and supports tracking and analysis of orders, user compliance, supplier performance, and spending patterns.

Commerce One MarketSite provides the transaction processing capabilities for Omnicell's OmniBuyer. Commerce One technologies enable OmniBuyer to access the content, services, and participants of other Commerce One marketplaces in the Global Trading Web, a network of over 30 interconnected e-Marketplaces worldwide.

Omnicell chose Commerce One's e-Business platform for two key reasons:

1. Technological superiority: Commerce One was the vendor most capable of addressing Omnicell customers' needs for ease-of-use, scalability, customization, and integration.

1. Partner relationship: A close partnership enabled Omnicell to optimize Commerce One's platform for its healthcare supply chain constituents.

OmniBuyer in Action

OmniBuyer is used by front-line hospital staff and materials managers to purchase products and services such as medical, surgical, and clinical supplies; goods for maintenance, repair, and operations (MRO); food and office supplies; and temporary labor. For temporary labor and items not yet on contract, OmniBuyer uses Commerce One's SmartForms and Special Request technologies to capture information on requirements that cannot be listed in the solution's main catalog.

Today, over 1,200 suppliers receive orders through OmniBuyer, with 80% of these orders processed electronically via electronic data interchange (EDI), XML, e-mail, or the marketplace. This high percentage of electronic order exchange is significant, as it delivers efficiencies to the back offices of both buyers and suppliers.

The other 20% of orders are sent via mail, phone, or fax, which reflects Omnicell's approach to let healthcare vendors maintain the same communication methods they have used with hospitals to date, speeding system adoption. While requisitions are created electronically in OmniBuyer, suppliers may not know whether the orders they receive are created in an e-Procurement system, because they receive the orders the same way they have traditionally.

"Just as companies don't need to involve their suppliers in ERP," said Omnicell's Werblin, "Omnicell does not change the relationships [healthcare facilities have] with suppliers. We help the customer control the processes within the four walls."

Indeed, the thrust of the OmniBuyer application focuses on internal efficiency and cost control. Hospitals want to use e-Procurement to capture transactional data to help them move toward product standardization and purchasing control.

By using OmniBuyer, healthcare facilities have visibility and insight into spending and demand patterns, as well as a way to enforce contract compliance. Maverick spend can be eliminated because purchasing selections are confined to the catalog, and transactions must go through approval routing processes within the OmniBuyer system before they are completed. "If employees have an approved list in a catalog, that is what they are likely to buy from," said Werblin.

Once a healthcare facility chooses OmniBuyer for e-Procurement, Omnicell provides counseling and support throughout the customer's catalog "elopment process, including catalog entry templates for guidance. Typical system implementations span 30 to 45 days.

Customers do their supplier enablement work for the catalog in a number of ways:

• Importing data from item master lists in back-end materials management systems to populate the catalog;
• Sharing a template with suppliers who can then create their own content for the catalog to be downloaded; or
• Outsourcing content "elopment to a contractor or third-party consulting firm.

Today, OmniBuyer's customers transact over US$5 million worth of goods and services a week through the system. Soon, the company expects to reach $10 million to $50 million a week as customers expand their implementations and as new facilities come online.

Case in Point: Ascension Health

Ascension Health illustrates the success of the Omnicell/Commerce One e-Procure-ment platform. Ascension Health, the largest not-for-profit healthcare system in the U.S., is based in St. Louis, MO. Its extensive network includes acute care hospitals, skilled nursing facilities, home care, hospice, community care centers, and several clinics, spending $2 billion each year on operational goods and services in total.

Formed through a merger of two large healthcare systems in 1999, Ascension Health's facilities relied on varying procedures and systems to purchase supplies. To make purchasing more consistent and efficient, Ascension Health "eloped a new supply chain management strategy, which included implementing e-Procurement.

"Our facilities were buying five different brands of one product, so we wanted to standardize our product use for price savings while maintaining a high level of quality," said Judi Laux, Director of Technical and Administrative Support Services at Ascension Health. "We asked ourselves, can we consolidate to one or two products?"

Compounding the range of products bought on the front end, Ascension Health had 11 different back-end systems in place across its 66 hospitals to manage supplies internally. Each individual hospital also had its own version of these applications, so Ascension Health had no way to aggregate data at the line-item level, preventing product value analysis.

"Each hospital was stand-alone, so there was no way to really pull together the data for analysis," said Laux. "Just to do a minor analysis took weeks, from 30 to 60 days to query the different materials managers, and another 30 to 60 days to compile the results. By the time we analyzed the information, the market had changed."

Seeking a solution that would automate its purchasing processes and give it a new way to analyze its overall spend, Ascension Health sent requests for proposals to more than 25 different e-Procurement vendors. Following a series of on-site meetings and demonstrations, the company narrowed its choice to OmniBuyer because of the solution's healthcare focus, robust workflow, and integration capabilities.

"We liked the Commerce One product, but the company didn't have any hospital installation experience," said Laux. "Omnicell had written some specific healthcare requirements on top of Commerce One, so the combination of Commerce One's platform and Omnicell enhancements pretty much sold us."

Ascension Health Implementation

To support the rollout of OmniBuyer and facilitate its product value analysis, Ascension Health has taken all of the hospitals' item and vendor master lists to create a master catalog of standardized items and providers. Working with its implementation partner Cap Gemini Ernst & Young and clinical experts, the team then loads the standardized data into each hospital's version of the OmniBuyer catalog.

To date, more than 1,500 suppliers have been loaded into the vendor master catalog at Ascension Health. Over 1,000 employees have user identification numbers to access the system; and 925 people in 8 to 10 key departments, including maintenance, operating room, and pharmacy, have sent requisitions so far.

The first e-Procurement system went online at Columbia-St. Mary's Hospital in Milwaukee in July 2001. Columbia-St. Mary's is spending $1 million a week through the system, processing 350 requisitions on average. Ascension Health will be pushing $8 million a week through the system relatively soon, as the first facilities expand beyond their pilot programs. Overall, the company plans to bring another facility on board every three to four weeks until all 66 hospitals are online.

Ascension Health Savings

"The immediate savings are in process improvements," said Laux. "Requisitions used to be handled by interoffice mail. Some of our clinics were just 10 miles away [from a main hospital with purchasing services], but it would take one to three days for a request to get to a materials manager, and another day to process. Now in a matter of minutes, an order goes to a supplier or to a materials manager for final touches. Everything is fully integrated in real-time mode."

Overall, Laux says, items are delivered two to three days faster than before automation. Columbia-St. Mary's has practically eliminated its cumbersome paper trail, and nearly all approvals are done online, "right up to the CEOs."

Ascension Health has also gained hard-dollar savings in select product areas through vendor negotiations. It sampled eight of its biggest hospitals and found they were paying eight different prices for essentially the same item, with a variance of 15%. Using its consolidated spend muscle, Ascension Health has been able to save from 5% to 8% on catheters, for example. Such leverage has generated efficiencies in other areas, including purchase monitoring, invoice reconciliation, and receiving.

"Compliance has been very tedious to monitor in the past," said Laux. "On average, 85% to 95% of purchases have been compliant, but OmniBuyer should give us the capability to make purchases even more compliant."

For receiving, employees now have easy and accurate access to assigned purchase order (PO) numbers and delivery addresses. "It has made their lives much easier. They receive items more quickly, and they get it to the right place more quickly too," said Laux.

The material managers are pleased with the OmniBuyer system as well, because they do not have people calling to find out the status of requisitions. In fact, materials management at Columbia-St. Mary's has changed its model: In the past, each buyer had a key department he or she worked with, but now buyers work by purchase order. This system makes it easier to aggregate requisitions into one PO, which yields additional process improvements as well. Accounts payable does not have as many invoices to reconcile, and materials managers now have more time for product analysis and sourcing activities.

Accounts payable personnel are also happy with e-Procurement. In the past, the department reconciled nearly 200 invoices each month because they lacked the corresponding PO number. Since implementing OmniBuyer, that figure has dropped to 30 POs per month.

Finally, end-users are relieved that the paper process has been virtually eliminated; the workflow automatically takes care of approvals; they can easily view real-time order status; and they have standardized product descriptions and lists of favorite products.

Future Plans

The OmniBuyer system facilitates Ascension Health's long-term plan of shifting to a self-contracting mode, instead of relying on Group Purchasing Organizations. Laux said the system will give the healthcare network a better understanding of its total spend, enabling it to perform the value analysis to control how it is spending its dollars and to negotiate with vendors, as well.

Laux noted that the Commerce One platform's ability to integrate with other marketplaces, supplier warehouses, and inventory systems is valuable as well. While Ascension Health has not integrated directly with any suppliers yet, Omnicell's implementation team is working with Ascension Health to integrate a version of OmniBuyer with a number of the existing back-end materials management and Enterprise Resource Planning (ERP) systems at the different facilities. It expects to gain process efficiencies from these integrations.

"What e-Procurement is doing is giving [Ascension Health] a common interface into all of [its] existing legacy materials systems," said Omnicell's Werblin.

Aberdeen Conclusions

With rising healthcare costs a constant concern, hospitals and other healthcare facilities must exercise even greater control over expenses. Consolidation in the industry has promised to bring some economies of scale, but this in turn challenges these institutions to put tools in place for tracking overall spend and better managing contract compliance and supplier negotiations.

Omnicell has demonstrated that streamlining the purchasing processes at healthcare facilities does indeed give the facilities visibility into their spend, which they can then monitor more closely for compliance and vendor discount opportunities. e-Procurement technologies are by no means a cure-all for healthcare industry ills. However, they can provide significant relief in the purchasing process, which has been less than optimal to date. Certainly, with $25 billion spent annually to support the work of doctors and nurses nationwide, every little bit helps.

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