Post-merger Global Healthcare Exchange seeks a balanced market

Healthcare Purchasing News, March, 2003 by Curt Werner

Mike Mahoney speaks with the confidence and conviction to a cause that trumps what must be an endless, numbing repetition of his company's ends and means. As the young chief executive of Global Healthcare Exchange, Mahoney has somehow transcended the echo of corporatespeak and retained the zeal and appearance that fit so comfortably and excited so many other young executives during the e-commerce flash of the late l990s, a roar that has since quieted to a whisper. That hard eventuality, accepted bitterly by some and with glee by others, was almost unthinkable when the notion of Web-based medical supply trading first hit the streets.

Mahoney's cause is not always simple to articulate, particularly with scores of detractors nearly always circling overhead. This time, Mahoney's task is to explain to a reporter why the Colorado-based company's latest move was a good one, and even on conference call, he sounds up to the challenge. In a fluid, relaxed voice, he talks about the agreement announced in late December to acquire Medibuy, a medical supply e-commerce pioneer that like so many of its predecessors succumbed to the twin culprits of dwindling finances and an industry that has been relatively slow to adapt.

"The deal for Medibuy comes down to three factors," says Mahoney. "It gives us significant cost savings, drives adoption and builds our product offering. We are giving 100 percent of the benefits of the deal to hospitals, suppliers and to GPOs."

Medibuy traces most of its financial roots to an early seed-money venture with Premier Inc. and later to similar deals with HCA and the HealthTrust Purchasing Group. In particular the original agreement with Premier drew controversy after the big GPO kicked in some $50 million just as the dot-corns were exploding in 1999. Affiliations with HCA and HealthTrust came later by virtue of pacts with EmpactHealth, a dot-coin startup that sold out to Medibuy. Post-Medibuy merger, Premier has become a "strategic owner" of GHX, though it received no cash from the transaction, which was rumored to be valued in the $28 million to $30 million range, a figure Mahoney insists is high. For its investment, however, Mahoney says Premier gets "a big win" on the cost side. "It will now cost Premier less to work with us than on their ownership of Medibuy," he says.

All venture capital money has been paid back, says Mahoney. "It makes sense for venture capitalists and others to be removed because they were not aligned with our guiding principles."

Just as they had for competing e-commerce ventures seeking to crack the hospital market, things started slowly for GHX. For a variety of technical and financial reasons, the dot-coms were slow to measure up to their high expectations. But now, executives like Mahoney and Neoforma CEO Bob Zollars are convinced that the sector has finally gained traction. "More and more hospitals have adopted our model," says Mahoney, "and we want to keep the profits from that model within the healthcare system." While that may sound altruistic, GHX has repeatedly said it has no plans to either take the company public or even to make a profit. "We really only want to cover our costs," he says.

It should be pointed out that GHX has as its prime financial support founding members bearing some deep-pocketed industry heavyweights: Abbott Laboratories, Medtronic, Baxter, Johnson &Johnson and GE Medical Systems. A slew of other big names have since joined in, giving GHX some impressive punch among its 17 strategic investors.

"We're out to make the market fair for both providers and suppliers," says Mahoney. "We have a board of directors that is balanced and a product and pricing committee that is split between hospital and suppliers." He says that GHX operates on a $35 million cost structure generated by a combination of $20,000 per hospital integration fees plus an ongoing software maintenance fee depending on the GHX services a hospital uses, along with an annual fee paid by each participating supplier. He says GHX is open to any supplier for unlimited use. "Both small and large suppliers are treated equally," says Mahoney. To date, about 80 suppliers have signed up with GHX, while Medibuy brings with it an additional 39. At the end of February, Mahoney says that the combined GHX-Medibuy site will have 1,250 hospitals live on its system.

For its integration fee and software maintenance fees, a participating GHX hospital can choose from a menu that includes reporting capabilities that allows users to recognize pricing discrepancies. The Medibuy deal, he says, adds REQ-S, another online reporting system that will be retained.

Mahoney brushes off criticism that the merger with Medibuy simply eliminates an e-commerce competitor that favored buyers over sellers. "We are just focusing on enhancing our value-added services," he says. "We now offer things like synchronized items masters, catalog and supply numbers, as well as tools to facilitate the verification of pricing and eligibility." In addition, he says Medibuy's added numbers will actually serve to lower the cost of the system to everyone. "This," he says in all sincerity, "is a ground-breaking event."