E-COMMERCE IS UNDOUBTEDLY THE WAY of the future, but even today, the Internet affects the way home medical products are distributed. By some counts, the Internet has between 17,000 and 20,000 health-related Web sites-and the focus on the home health segment of the health care industry is growing fast.

Meanwhile, the players and the rules keep changing-seemingly on a daily basis. This market volatility has manufacturers, distributors, providers and even dotcoms scrambling to position and reposition themselves just to stay in the game.

While no one can predict the future with any degree of certainty, most experts agree that all these players-be they traditional companies or newcomers to the health care industry-will not make the cut. The winners, they say, will be those that add value to a fast-paced market now controlled by convenience, efficiency and name recognition.

"I think we're always going to cut out people who don't add value," says Alan Stevens, president of Boulder, Colo.-based ProductBuzz, a dotcom focusing on the home care industry. "To us, that is 100 percent of the key. The novelty of a new Web site is going to wear off very quickly, so with every step we take, we really focus on how we are making it faster, better and easier for customers. Where are we really adding value?"

NEW NET WORTH IN ADDITION TO CREATING new, efficient venues for HME commerce, dotcoms have brought value to the supply chain with their marketing expertise.

"We certainly become a resource for people for whom that's not their core competency," says Stevens.

That is indeed what manufacturers such as Leisure-Lift Inc. say they need as they get into e-commerce. "I can't afford to be a pro [about Internet marketing]," says Ron Weldon, director of sales and marketing for the Kansas City, Kan.-based manufacturer, "but these dotcoms are pros. I can just pay them for that."

In this way, he explains, his company can focus on what it does best-make product-while still leveraging the brand of a dotcom. "Small to midsize companies like my company need to spend money on branding, and these dotcoms spend money branding," he says. "So why not combine with them and get more bang for the buck?"

Very few dotcom companies have warehouses or do product distribution. Instead-and especially as they enter new industries-dotcoms are all about branding the marketplaces they create. Ultimately, their success will be based not only on how well they integrate with key players in the traditional supply chain but also on how well they attract loyal buyers.

"All of our strategic alliances have been oriented around getting to the buyer and having the buyer come to our site," says Bob Flury, executive vice president of business development at Neoforma, Santa Clara, Calif. "We have about a quarter-million line items on our site right now and about 900 regional and national suppliers."

Currently, all the products Neoforma and ProductBuzz list can also be bought through brick-and-mortar channels. "Whether product will go exclusively online like manufacturers in other industries have done depends on what percentage of the community actually buys online," Stevens says.

Another key way dotcoms are influencing HME distribution is their ability to mimic buying groups. "Take the acute care market and the rise of [group purchasing organizations] over the last 10 to 12 years," Flury says. "You have seen a substantial amount of price reduction that was driven by the power of the aggregated buy. We believe the same kind of benefit will incur to the nonacute care market because the Internet allows you to far more cheaply and far more efficiently aggregate smaller buyer communities into large national buying organizations." (For a look at how traditional HME buying groups are becoming players in the Internet economy, see the story on page 47.)

"You get the same kind of objectives and same kind of groups online that you would get off-line," echoes Stevens. "What I see is a whole lot of dotcom companies that at one point wanted to be marketplaces that are now recasting themselves as group purchasing organizations, which is an interesting thing to do strategically because it puts them at cross-purposes with a lot of the industry."

DISTRIBUTORS' NET VALUE DOTCOMS MIGHT STEAL the headlines, but a lot of value still remains with the existing network of HME distributors. "What I don't think is going to happen is new players' coming on hoping to be online distributors without an off-line component," Stevens says. "They need a brick-and-mortar component to succeed."

"If you think you can actually come in and supplant the existing players, you are probably in for a rude awakening," says Ed Rollins, M.D., chairman and CEO of Johnson City, Tenn.-based Cimtek Commerce, home of MedicalBuyer.com. "The world has finally come to understand that e-commerce is a channel for selling and procuring information, but it doesn't replace the need to have a box go through a warehouse and be delivered on a truck."

Adds Weldon, "A dealer can buy my products through ProductBuzz.com, DistributorOrder.com, Medmarket.com, Neoforma.com-all of those places. It's a big change from the way it is today, and it's happening overnight. But the key link in there is that we're going to go through distributors in all likelihood."

Which distributor the product flows through is increasingly a matter of service differentiation. "We have a big business of providing fulfillment and category management for people who are involved in e-commerce," says Steve Cole, president of Dedicated Distribution, a Kansas City, Kan.-based wholesale supplier. "It's easier to draw upon our inventory and ship directly to the consumer than it is to bring them into the warehouse and pretend that their customer service is going to know anything about it or that they are going to maintain an inventory of the broad number of SKUs needed to support home health care."

While larger players in the home care industry tend to buy directly from manufacturers, many providers prefer to work with wholesalers, as do manufacturers who can't fill every small order efficiently.

"There is a decisive trend of home health care providers moving from ordering direct to running business through wholesale distributors," says Cole. "Whether they communicate that order by telephone or fax or e-mail or EDI [electronic data exchange] or Internet-direct connection is only a mode of communication. The function exists and is growing in importance."

PROVIDERS' NET VALUE THE HME INDUSTRY is not just about product distribution, of course. It also includes claims processing, service and a lot of customer support.

So the question facing virtual businesses is: Can the people ordering a product by e-commerce get what they want and what they need?

"A walker delivered to the home and assembled and adjusted to the right height for a specific consumer is a different product than a walker shipped in a box and delivered to a doorstep," notes Cole. Similarly, a variety of other, more complicated and service-intensive products are better routed through local HME providers.

This value can't be taken for granted by providers, however. "They've got to understand today how to establish their value in the distribution channel," Weldon says. "I am very biased because the products I sell are mobility products-scooters, wheelchairs and the kinds of things that lend themselves very well to being touched and ridden before they're bought.

"But dealers as we know them today don't understand where they are in the distribution channel," says Weldon. "But if the dealers can't hold their value in the distribution channel, the Invacares of the world are going to run right by them."

To survive shrinking margins and profits, many believe that HME providers will need to be more proactive and communicate the value of theservices they provide by putting up their own Web sites-or at least joining a digital marketplace. They will need to establish themselves as valuable e-commerce partners at the same time they communicate to consumers the added value they provide.

"I think it's important for providers to have a window to be seen by Internet consumers," comments Steve Neese, vice president of e-commerce at Invacare Corp. in Elyria, Ohio. "We're coming to a point in history where the most affluent generation in the history of the world is getting into the age bracket where they're going to need these kinds of products. And this is the same generation that's very big on using the Internet."

Providers have to move quickly, however, because vendor notions of distributor territories are fading fast.

"We always thought about a dealer as being physically here or there and that it is his or her territory," Weldon says. "The Internet has changed all of that. What the territory is now is global."

Even with such aids as an Internet-based "provider locator," he adds, "defining and protecting a territory is going to fall more on dealers than it is on manufacturers."

According to Rollins, "Some may be quick to think the power of the Internet is going to devastate the local provider, but it's not that we are going to put them out of business. What it is, is that those who use and leverage the Internet are going to have market share reallocated to them from those who do not."

A NEW GAME PLAN? SUCH REASSURANCES ASIDE, one of the biggest questions posed by powerful e-commerce sites-be they hosted by dotcoms or manufacturers-is how much they will bypass or otherwise displace traditional distributors or local providers.

"Early on, a lot of industries were worried about their distributor networks or providers getting 'dis-intermediated,'" Neese says. "Invacare has been published numerous times and has said in speaking engagements that we do not plan to disintermediate any providers. Our strategy is exactly the opposite: It's to use the Internet to help funnel consumers to providers."

Still, the Internet is making it increasingly clear that no intermediary-distributor, provider or other -can survive without contributing value. Success in the Internet economy will come down to delivering value and communicating that value to business partners and consumers. "I think what you will start to see is a lot more partnerships between different people with different core competencies in getting together to deliver value-added services," Stevens predicts. "But if you ask me if the distribution is going to change, I think the answer is no.

"What I would say is that those players that embrace technology to provide more value to their customers are going to stand out," he says. "The ones that don't do that, by comparison, are going to provide less service-and the economics of that are pretty straightforward." HC