News | May 19, 1999

The Impact of Information Technology on Purchasing

Editor's note: The following interview with Manoj Kenkare, Healthcare Information Systems Analyst, Frost & Sullivan (Mountain View, CA) outlines how information technology has impacted hospital purchasing and its potential future effect. According to the recent Frost & Sullivan report, "U.S. Hospital Information System Markets," the overall hospital information systems industry makes up 36% (five billion dollars) of the $14 billion healthcare information systems industry. Hospital Financial and Administrative Solutions (HFAS) systems, one part of the hospital information systems industry, enable healthcare organizations to control supply and purchasing costs, improve human resource departments, and monitor the financial and administrative functions of the hospital. The HFAS market revenues for 1998 totaled $1.69 billion. Other segments covered in the report include the hospital patient electronic medical records area ($464 million in 1998), the hospital electronic claims processing market ($261 million) and integrated hospital information systems market ($2.66 billion). (See sidebar for a summary of findings involving HFAS.)

How have HFAS impacted the purchasing function in hospitals?

The role of HFAS has changed dramatically over the years. The new wave of enterprise resource planning (ERP) software has been introduced to take the responsibility of handling the complex materials management and purchasing functions in a provider facility. These systems can help an organization to manage the entire gamut of its business activities, such as product planning, parts purchasing, inventory management, financials and accounting, supplier interaction, customer service, ordering, and human resources management.

Most large organizations began their computerization process with their financial systems, and then moved into areas like payroll, customer information, and inventory control. Vendors use computers for materials resource planning (MRP), and various other industries developed and introduced their own industry-specific applications. Healthcare is no exception.

The 1990s saw a trend toward applications integration. With the rise of ERP, hospitals have started connecting their clinical and production systems with their financial systems. This has given hospitals an opportunity to share data between different systems. Every new application that is brought into the equation greatly adds to the complexity.

To deliver care in a more cost-effective manner, providers are forming integrated health delivery networks (IDNs) that may include acute-care hospitals, physicians' offices, outpatient clinics, home care, long-term care facilities and payor entities. This has resulted in a common purchasing function beneficial to the new organization.

Through the use of HFAS, provider organizations can now control supply and purchasing costs efficiently and productively improve human resource departments, and continuously monitor the financial and administrative functions of the hospital.

One should remember that although various solutions both "home-spun" and "store-bought" have been available, they have not achieved the level of provider acceptance necessary to become ubiquitous.

HFAS has forced providers to take a careful look at the role "committed purchasing" plays in hospitals' materials management strategies. Beyond pricing concerns, commitment paves the way for product standardization and appropriate utilization.

Some of the specific advantages on the purchasing function through installation of HFAS are:

  • It aids providers in its efforts to be a leader in cost containment.
  • It saves time, particularly in the purchase of generic or commodity type items.
  • It allows the manager to redefine his or her responsibilities and focus on strategic value analysis and management.
  • It provides for better control of quality and improves distribution patterns.
  • It improves quality of service.

What specific challenges does the hospital purchasing function face in future and how can HFAS help address these challenges?

The most significant challenge today involves the Internet. Many companies strive to package an innovative e-commerce solution to the healthcare industry through integration of Internet-based real-time product pricing and ordering information into ERP modules.

Understanding a customer's needs, limitations, and expectations is one of the greatest challenges for vendors. Often, customers that are eager to implement HFAS into their purchasing environment express their intentions through requests for proposals (RFPs) that exceed their actual budget. This creates problems for the vendor, especially when customers reassess and alter specifications midstream.

Market segmentation within HFAS is becoming an almost impossible task as vendors sell more through systems integrators. As the basic components of the HFAS continue to overlap, the urgency for clear lines of communication becomes greater. The challenge of providing coherence and clarity to industry terminology has become even more important. What's more, providing the best purchasing systems as a part of the HFAS components, including workstations or software, depends entirely on intercompatibility.

Hospitals have already passed an extremely important phase in their life-cycle. Year 2000 compliance is a challenge that all hospitals have been working toward. Adequate steps have been taken to ensure that all the systems are in compliance with the standards defined by the federal authorities.

The Internet has tremendous potential. The future will see a hospital purchasing manager electronically submit an RFP for hospital supplies to a central authority, which in turn will forward the request to all vendors registered with the company. Vendors will send bids directly to the hospital within 24 hours. The hospital will then select a vendor, and the deal will be completed. It may seem very easy on the paper but getting the systems to work should be challenging.

The gross misunderstanding of the terminology as far as classifying HFAS systems and the various functions it performs is also an issue. But more important than the terminology is what it represents. We are moving to a new era, where cross-functional integrated software packages are becoming the norm, in every industry and among every size of organization. The trend is marked by some very uneven offerings from some of the suppliers, and by many implementation problems among users, but it is unmistakable and inexorable.

HFAS certainly work with providers to address a lot of these challenges. Use of new technologies and the Internet has brought all the people in the supply chain and the hospitals together. The quality of information that is processed has certainly improved by the installation of these systems. HFAS strive to integrate the different functions in a hospital to ensure that the lead time for any purchases made meet the predetermined goals of hospital management. Some of the challenges mentioned above can certainly be addressed by the HFAS, but not all. Vendors are working hard to address a lot of the challenges and work with the hospitals to make the purchasing function as painless as possible.

How much of HFAS is specifically directed toward the purchasing/materials management function in hospitals?

Today less than 10% of HFAS is specifically directed toward the purchasing/materials management function. But HFAS can result in cost savings in the range of 10 to 40% following installation.

For more information, please contact: Nick Mariottini, Tel: 650-237-4382; Fax: 650-903-0915 E-mail: