VA could save billions using e-commerce technique, officials say

The Veterans Health Administration could slice $500 million to $700 million a year from its budget by using a sophisticated form of electronic purchasing to buy supplies, drugs and services, the former leader of the agency told senators Wednesday.

Dr. Kenneth Kizer, VA's undersecretary of health in the late 1990s, told members of the Senate Veterans Affairs Committee at a hearing that private hospitals using a technique known as "expressive commerce" typically see savings in the range of 12 percent to 18 percent on purchases.

In his testimony, Kizer said that based on the Veterans Affairs Department's budget for medical and surgical supplies, pharmaceuticals and facilities maintenance, "and factoring their already preferred government pricing, I would anticipate VA could achieve savings in the range of several hundred million dollars in the first year after starting to utilize expressive bidding (i.e., $500 million to $700 million), with probably much larger savings as experience was gained with the technology."

In expressive commerce, suppliers use a secure Web site to submit sealed proposals that include conditions such as volume discounts and rebates, differing payment terms and package offers. The idea is to allow suppliers to make their case in much more detail than existing e-commerce methods.

The University of Pittsburgh Medical Center started using expressive commerce two years ago. Philip Green, head of the strategic business initiatives unit at the center, said the technology can generate savings of between 8 percent and 14 percent or even higher on purchases of a wide range of supplies used by hospitals.

Green said his medical center has formed a joint venture called CombineMed with the key player in the expressive commerce field, Pittsburgh-based CombineNet Inc. The center, he said, was seeking to shave costs in its supply chain when it found that CombineNet's software was being used by "incredibly sophisticated organizations" such as Procter & Gamble to cut their purchasing costs.

Kizer said expressive commerce, also known as "sourcing optimization," is an established practice not only at Procter & Gamble, but other private companies such as 3M and Johnson & Johnson. It also has been adopted by the U.S. Postal Service and the United Kingdom's National Health Service.

Tom Finn, president of CombineMed, said its software allows for the nuances found in a face-to-face discussions between a buyer and seller about a range of needs and requirements.

Other types of e-commerce software tend to be price-driven, Finn said. But the lowest price for a medical instrument may not be the lowest cost, if, for example, it is a new model that requires retraining of medical personnel.

CombineMed can handle millions of bids with hundreds of thousands of constraints or permutations, Finn said.

Green said the University of Pittsburgh Medical Center recently awarded a contract based on a proposal covering 600 different line items that saved $600,000 over more traditional purchases.

Kizer said the VA should "vigorously pursue" the use of expressive commerce to help realize savings on a health care system budget that is expected to hit almost $38 billion in 2008, up from just under $33 billion in fiscal 2007.