Two years ago, Troy Kirchenbauer got an opportunity most employees would shy away from – the chance to put his company out of business.

The former Novation executive and current general manager of Aptitude LLC, a new web portal spunout of the Irving, TX.-based group purchasing organization, was tasked with leading a team with the mission of tearing apart not only Novation’s business model, but the method by which hospitals buy billions of dollars of medical equipment every year.

"Part of our mission was to look at the market as if we were an Amazon or a Google, which had decided to invest millions of dollars to explore how to redefine the healthcare supply chain and do it in a way where there were no sacred cows and no holds barred associated with looking at how we can optimize the future," Kirchenbauer told MassDevice.com in a recent interview. "Rather than having Novation sitting back and waiting for our competitors to define the future, we’d rather take the lead and drive it ourselves."

"At Novation we represent the buyer’s interest. This model really turns that on its ear. It brings us out of the role of negotiator – our focus becomes reducing the cost involved in the process for buyers and sellers. … We haven’t shied away from the idea that this could be disruptive to our business."
                                                                                                                                                                                  – Troy Kirchenbauer

Read our recent story on Aptitude’s launch

The result of that work launched this week with the release of aptitude, an online marketplace for medical device companies and hospitals to interact in a manner similar to an E-bay or an Amazon.

We caught up with Kirchenbauer to talk about the new application and his part in the creation of a potentially paradigm-shifting product.

MassDevice.com: What were Aptitude’s origins and how does it differ from the current GPO model?

Troy Kirchenbauer: Aptitude is the result of an investment in innovation on the part of Novation.

We’ve really spent the last couple of years looking at market models and trying to find alternative ways to bring buyers and sellers together in healthcare, which would reduce the cost of brokering those relationships and create incremental benefit for both the buyer and the seller to help alleviate the challenges they experience today in the market.

As you know on the supplier [or medical device company] side of the ball, there’s tremendous challenges around maintaining margin, given government regulation, the medical device tax and other challenges related to the economy.

On the other side, buyers [or hospitals] are facing healthcare reform and are trying to find ways to reduce costs in an economy that’s not cooperating.

Ultimately, the goal of this effort was to back up and completely re-examine how we do business. We were willing to put anything on the table to try and find a new way of doing business. That’s really what Aptitude represents.

MassDevice.com: How does it work?

TK: Aptitude, very much like E-bay, provides a marketplace where buyers and sellers can come together. You have pre-defined buyer and seller entities in the market. The market is infused with data that’s provided by the participating hospitals.

Unlike e-sourcing applications on the market today, the data is already there. Hospitals are providing monthly feeds of all of their purchasing information at the invoice level to Aptitude; that serves as the basis for the market, not only to facilitate brokering between the buyers and the sellers, but to manage the performance of those agreements on behalf of buyer and seller. We seek to borrow some of the best things from the local and national contracting strategies and make those available in this new model, that we call direct contracting.

For example, in local contracting, a hospital is able leverage its power to make very firm commitments to sellers, whereas in the national model there are a lot of efficiencies to be gained by having a standard set of terms and conditions that are pre-conditioned for buyers and sellers, so that they can focus on price acceptance.

Aptitude allows both of those practices. It also increases the transparency that sellers have in understanding the potential buyer.

Buyers come onto the platform and their market information is already loaded [into Aptitude]. They elect to do a bid in that category, they can see who the players are in the market, can see how they already work with those players, what the current spend is and in a couple of seconds submit a [request for proposal] that would likely take a month for them to build, today, on their own.

Sellers receive that information and then receive unparalleled transparency on that buyer’s profile. They can understand their current market-share position, the total category potential of the buyer and see line-item information and use automation to respond to cross-reference requests.

From there, the seller provides a fairly structured pricing response, with many potential options for the buyer to consider, and they can do that in a way where they can visualize how the buyer will compete with current pricing today. Finally, when the buyer receives back the offer, we automate a number of "what if?" scenarios to help the buyers make the best contract determination, based on their percentage of product in that category.

At the end of the process, we then measure, in an ongoing way, whether hospitals are receiving the savings they planned on based on the contract offer, and suppliers have visibility to see if they’re getting the market-share performance the buyer was promising.

Part of the real innovation here is not only are we changing the business model, but we’re changing the focus. The focus isn’t just on the bid event and getting to the contract. The focus is on managing the contract through the life-cycle of the contract agreement.

MassDevice.com: How transparent are the terms of the contracts, for the buyers – the hospitals – and the sellers – the medical device companies?

TK: The buyer provides line-item information to the selle,r so the seller knows what the competitive products are. This mirrors what happens today on spreadsheets. The new innovation we have here is that today it’s a real challenge for the seller to understand the true category potential of the business, or what’s the total opportunity of business for the seller company.

Because Aptitude is taking information from the hospital’s accounting system, we’re providing [medical device companies] with a total potential number, as well as an understanding of what the company’s current market share is in that total number.

Sellers are getting unique access to the opportunity from each buyer. Not only that, we show the seller the seasonality of the purchasing patterns of the hospitals. If you were to win a large percentage of the market share from the customer, you could use that information to structure your inventory management to make sure you’re addressing their sourcing needs.

MassDevice.com: Novation handles products across the spectrum of hospitals and providers. Will Aptitude mirror that, by representing products across the spectrum of medical technologies?

TK: Based on the current functionality, Aptitude would be limited to addressing categories with products that have part numbers and are identifiable on invoice-level detail. But we have plans to look at other things like services – where we could expand the capabilities of the platform to bring efficiencies to those markets.

One of the real efficiencies we saw in our 12-month proof-of-concept phase, from having the pre-negotiated terms and conditions and being able to move the data back and forth between buyer and seller efficiently, we had buyers and sellers doing actual live contracts in about a month. Typical contracting processes for local contracts take anywhere from 6-9 months; at the national level it can be 9-12 months, depending on the category. So it’s a very significant reduction in cycle time for bringing buyers and sellers together.

MassDevice.com: How do sellers take part in the marketplace? Are there criteria they must meet, or do they have to be Novation-approved vendors?

TK: There are very minimal thresholds to being a participant in the marketplace. In other words, I would say it’s open to all suppliers to participate, assuming they’re not blacklisted. It’s an open marketplace that seeks to onboard suppliers across the market as well as potentially all hospitals in the U.S.

MassDevice.com: What’s the reaction been from the device industry?

TK: I think they’re very intrigued. Early on in conversations, they want to paint us with a brush of what they’ve seen from other e-sourcing platforms that are very buyer-centric. Aptitude seeks to be a market where buyers and sellers are both customers of the platform.

It’s really a paradigm shift, if you think about how Novation works and what we do. Historically, what we do at Novation is represent the buyer’s interest and try to negotiate the best contract possible. This model really turns that on its ear. It brings us out of the role of negotiator, and our focus becomes reducing the cost involved in the process for buyers and sellers.

We have some major medical device manufacturers, which are excited about Aptitude and are signing up early on. Some of the benefits they suggested relate to the cycle time and efficiencies for managing the RFP events. One organization said they spent between $3,000 and $5,000 per RFP response. In a platform like Aptitude, they provide their typical RFP response 1 time online and those are available to the buyer market to review and make appropriate decisions. They can also make available whitepapers and other background material to help an organization make a determination, not just on price, but on the price/quality equation.

MassDevice.com: What’s the business model for Aptitude?

TK: The business model is based on a subscription fee approach for both buyers and sellers. There’s also a transaction fee that suppliers will pay on contracted business. The fee goes towards offsets for contracts that are managed in the platform, monthly reporting that buyers and sellers get back on performance of market share as well as price.

It’s a percentage fee, but it’s lower than the typical GPO fee structure. That’s predominantly based on the fact that we’re not a GPO and there’s no co-operative return. In this market model, sellers are able to position their value proposition in price or rebate value directly to the customer rather than route that back to another channel.

MassDevice.com: Do you think medtech companies are going to be able to reduce their [selling, general & administrative] costs with Aptitude? Is the real benefit they see here?

TK: That’s what we saw in the pilot. In the qualitative analysis we completed after the pilot program, we got a strong score from companies that said they expected to reduce those costs.

MassDevice.com: How much does this impact the typical medical device sales rep? It sounds like this could be potentially disruptive to their business.

TK: Our hope is that, for those individuals Aptitude would help [medical device sales reps] sell the value of their products over the competition and not spending a lot of time late at night in hotel rooms building cross-reference spreadsheets and those kind of things. We think it can help focus salespeople on what matters.

MassDevice.com: This has been 2 years in development. What was your role in the project?

TK: One of the things around innovation that we pursued was really challenging orthodoxies around our business.

One of the orthodoxies around the healthcare supply chain is that the market is opaque. What we began to do was look at other business-to-business markets – what were the fundamental tendencies and premises that made those successful?

We started studying open markets and other avenues of bringing buyers and sellers together. I would say that it was through those examples, and based on years of experience in healthcare, that we tailored the marketplace in Aptitude.

My role was specifically to lead the team that took that initial idea through a thought process to determine if there was a product that could spin out of that idea.

MassDevice.com: What were some of the models you looked at?

TK: We went back to models such as the Chicago Board of Trade & Mercantile Exchange. These were places where buyers and sellers were coming together to establish future pricing for goods and services. We learned that in those models, there were the fundamentals of open competition and symmetry. Neither buyer nor seller had a tremendous advantage around a knowledge of the market.

The 3rd premise was that contracts were enforced. Ultimately 1 of the big challenges our device manufacturers expressed was, "Every 2-year contract today lasts 6 months."

If you think about the SG&A to responding to those bids on a rapid-fire basis, it’s extreme. So we really began to think about how those fundamentals could be re-imagined into a marketplace that could make that cost go away.

We wanted to think about how risk is shared between buyers and sellers in these contracts. If sellers are carrying more risk of market change, how could you reward buyers for stepping into some of that risk?

MassDevice.com: So what’s the value to the GPO? It seems like this could potentially be disruptive to that model too.

TK: We haven’t shied away from the idea that this could be disruptive to our business.

In fact, part of our mission was to look at the market as if we were an Amazon or a Google, which had decided to invest millions of dollars to explore how to redefine the healthcare supply chain and do it in a way where there were no sacred cows and no holds barred associated with looking at how we can optimize the future. Rather than having Novation sitting back and waiting for our competitors to define the future, we’d rather take the lead and drive it ourselves.

Aptitude is a wholly owned subsidiary of Novation and will operate independently from Novation, with a separate management team.

MassDevice.com: Can we focus again on differentiating value, because in a marketplace environment price would seem to become the differentiater. How do you combat the idea that this is just a tool to lower the cost of devices?

TK: I would suggest that a lot of the churn in today’s marketplace is the fear that buyers are paying a price that is out of bounds with what their peers are paying.

Ultimately, the price/quality equation is important to every single buyer. The key around price isn’t that the seller is paying the lowest price for a widget, but that they’re paying a market-appropriate price for a product that provides a level of quality that patients are expecting.

Ultimately, I believe Aptitude recognizes that price is part of the sale, regardless of whether this is an economy-grade product or premium-grade product. Making sure the customer believes they’re getting a market-appropriate price for a quality product is a taxing part of the job that the sales rep has to take on. If we can make that process more efficient for them, and allow them to spend more of their time ensuring that physicians and finance-oriented buyers understand the quality differences and clinical outcomes and total cost associated with products, that could be a tremendous benefit.

MassDevice.com: IMS Health has built a fantastic business using utilization data from pharmaceutical products. I’m wondering if you think this has the same potential for medical devices?

TK: I think it’s certainly something that is on our business development road map for consideration.

MassDevice.com: So down the road you could potentially say, "This is how many orthopedic implants were sold in the U.S., and this is the breakdown of market-share leaders for this business?"

TK: Absolutely.