MedChannel Takes on Health Care Supply Hurdles

by Adam Feuerstein

Richard Sommer, a former health care executive-turned-Net entrepreneur, is blunt in his assessment of online medical equipment marketplaces such as Neoforma.com (NEOF), Medibuy.com or Broadlane.

"These guys are dead in the water," he says. "They're doing nothing more than allowing hospitals and doctors to order supplies from an online catalog. They're not addressing the real inefficiencies or cutting costs in the health care system."

Sommer is CEO of MedChannel, a San Francisco company that is taking a different approach to bringing e-business to the health care industry. The company is building an online network that connects all participants in the health care marketplace -- manufacturers, suppliers, distributors and buyers.

Only by focusing on what he calls the "back end" of the health care industry, says Sommer, can a Net marketplace have any real impact.

$11 billion wasted

What kind of impact? Sommers quotes a consultant's report that identifies $11 billion in waste just waiting to be cut from the health care industry. But only $1.7 billion of that can be addressed by connecting doctors and distributors over the Internet -- or what Neoforma, Medibuy and Broadlane are doing. The rest of the fat is in the industry's outdated supply chain and faulty inventory control systems.

And over the past few years, controlling supply chain costs have become a big deal for hospitals and health maintenance organizations, which are bleeding red ink because their ability to raise fees has been all but stopped.

The MedChannel platform provides real-time information access, product visibility and connectivity throughout the entire medical supply chain. That sounds like a bunch of high techno mumbo-jumbo, but it's not that complicated.

When a doctor orders a box of rubber gloves, that order is sent to the regional distributor's warehouse, which can let the doctor know immediately if the gloves he wants are in stock. When the regional distributor processes the doctor's order, it also sends a message back to the national distributor for rubber gloves, which in turn, sends a message back to the rubber glove supplier, which in turn, sends a message back to the rubber glove manufacturer.

All this happens in real time. Today, this kind of information about product demand and forecasting can take three months to six months to make its way back through the supply chain. And when it does, the data is transmitted via reams of paper reports, not electronically. The result: Higher product prices because manufacturers pour their resources into making products that are not in demand, distributors have to maintain high inventory levels, and orders are not filled accurately.

MedChannel is currently testing its system with a U.S. doctors' group, a medical supplies distributor and several manufacturers in China. The hope is that connecting all parties in the supply chain will result in better demand forecasting, lower inventory and order management costs, and therefore, lower product prices.

Wonky strategy, significant support

The company's strategy is a bit wonky, but it has generated some significant support. In March, the company raised almost $50 million from an impressive roster of technology and health care partners. These included VCs Trinity Ventures and Bessemer Venture Partners; health care venture investors Frazier & Co. and Three Arch Partners; strategic health care investors Tenet Healthcare (THC) and Johnson & Johnson (JNJ); as well as Goldman Sachs and Chase H&Q.

With money in the bank and a successful test program under way, Sommer is busy inking deals with other health care partners, including large distributors and manufacturers.

While he's critical of the online medical supplies marketplaces, they are also potential partners, he says. Broadlane, for instance, could provide the front-end piece -- connecting doctors to distributors and suppliers -- while MedChannel works further back in the supply chain. (Broadlane is backed, in part, by Tenet Healthcare, a MedChannel investor.)

Other potential partners include the Net market being set up by Johnson & Johnson (another MedChannel investor) and other large medical suppliers.

MedChannel's big hurdle, however, will be twofold: Convincing traditional health care players that their approach can really trim costs, then actually integrating its platform into what is an insanely complex knot of divergent health care IT systems. As with many b-to-b upstarts, potential is still way in front of execution.