In Chicago a few years ago, it was hard to escape the hype surrounding Groupon, a local Internet startup that made good.

The company, which e-mails its customers group-buy coupons for everything from electronics to cupcakes, made headlines with its innovative business model. In 2010, it even attracted a multi-billion dollar buyout offer from Google (which it turned down).

True, today, its reputation is not what it once was. The stock has lost half its value since it went public in November, and it has to compete with rival daily deal programs set up by Amazon and (yes) Google.

But the Windy City company's early success did leave an impression on the founders of OpenMarkets LLC., a start-up that makes its home in Skokie, Ill., a northwest suburb of Chicago not too far from Groupon's corporate headquarters.

Although OpenMarkets' model is quite different from Groupon's, the firm is also in the business of bringing the magic of group buys to consumers. In this case, it's for hospitals buying capital equipment.

"There's about $50 billion of capital being acquired every year, the majority of that by the 6,000 hospitals in the U.S.," says Dan Michalek, the company's co-founder and CEO. "There's just a tremendous amount of commonality in what all these hospitals are buying."

And OpenMarkets, which was launched about two years ago, hopes to take advantage of that commonality by aggregating buyers of mid-priced capital equipment to achieve bulk-purchasing discounts.

The idea works like this: OpenMarkets asks its client hospitals for their yearly capital equipment budgets. When it finds common ground — say, a number of hospitals want to buy ventilators in the fourth quarter — it approaches vendors to see if they can be sold on a deal. So far, OpenMarkets has held events for items like Draeger infant warmers, LG hospital-grade televisions and Philips defibrillators.

The key, as Tom Derrick, OpenMarkets' vice president, explains, is to create win-win situations for buyers and vendors. Buyers get cheaper equipment, but sellers -- while taking a price cut -- are guaranteed high-volume buys at a low cost of sale. The system might not work for the newest technology, when a manufacturer needs to use sales staff to explain benefits to would-be purchasers, Derrick says, but it could be the thing for more mature equipment in the marketplace.

HOW YOU SAVE MONEY

For the buyer, the draw is savings on products. These will vary a lot, but OpenMarkets says it has seen deductions between 5 and 45 percent on the "benchmark price," the lowest known amount recently spent on the item.

Here's how it works. There are three important prices for capital medical equipment: the list price, which basically nobody ever pays; the contract price negotiated by a group purchasing organization, generally the starting point for most hospital dealmakers; and the known cheapest price recorded from an actual transaction. This last one is what OpenMarkets bases its deals on.


For instance, on a recent event for the Resuscitaire, Draeger’s infant warmer, the list price for the equipment was $19,990. The average GPO contract price was $15,213. But the lowest known price was $12,990. In its event, OpenMarkets was able to get a deal for $9,983.

HOW THEY MAKE MONEY

The group itself makes money two ways: first, there's a yearly subscription fee, which varies depending on the hospital's bed size, from about $2,500 to $4,500. But as Michalek explains, this is only a hook. "It gets them in the club," he says. "It gets them engaged and gets them invested, encouraging our clients to communicate their capital needs to us.”

But the company plans to get the main source of its revenue by taking a cut of the savings on the things users buy. Michalek says they take 25 percent of the difference between the product's best known price (the benchmark) and the price they negotiate with their deals.

The idea is to incentivize the company to get good deals -- the more its customers save, the more the company makes.

MARKET FOCUS

OpenMarkets focuses on what its executives see as an untapped market -- equipment that costs less than $200,000. For more expensive stuff, usually over $500,000, some institutions, such as health systems with multiple hospitals, will run their own aggregate buys.

"A successful event for us can generate 100 TV sales, saving 45 percent," Derrick says. "Granted it might not be as sexy as a deal for 100 CT units, but it still creates value for our clients."

And although GPOs do often have their own group buying events, they're usually created with the suppliers, and not as a result of GPO member demands, Michalek says, so he thinks more providers will participate with his program.

That said, OpenMarkets is careful not to try to position itself as a competitor to GPOs. The company says while it currently has no formal arrangements yet, it could help friendly GPOs with revenue-capturing programs: that is, reporting back deals to GPOs so they can be sure to get their administration fee from vendors, an important source of revenue for the organizations. Also, OpenMarkets' staff point out they share a common lineage with GPOs: Alan Weinstein, the founder of the GPO Premier, sits on OpenMarkets' board, as does John Strong, the former president of Consorta.

"We recognize the value that GPOs provide," Derrick says. "Part of our DNA at OpenMarkets is from that same group that organically created the GPOS, and that is organically creating OpenMarkets here. "

EARLY DAYS

But these are still early days for OpenMarkets. The company, which has under 20 employees, was incorporated in late 2010, but only launched its first deal last fall. Since then, it has done just five or six events, for a total transaction volume of under $1 million, according to Tom Derrick.

Right now, the company has a network of 400 hospitals that it's busily trying to grow. In the last month, it announced three new clients: Beaumont Health Systems near Detroit, the Methodist Hospital System in Houston and Heritage Valley Health System in Pittsburgh.

Also, for the company to succeed, it has to get providers involved. One soon-to-be-launched program for encouraging provider participation is the "buying room." In effect, this is an online tool for its clients where they can create or join groups of other supply chain executives all looking to buy the same equipment in the same time period. When enough people join a group, OpenMarkets would then approach vendors to get a deal going.

CHIEF CONCERN: MALAISE

But of all their corporate challenges, Derrick says at the foremost is what he calls the "malaise" in health care to try new approaches. Still, the company says as providers become more eager to pinch pennies, OpenMarkets will take on more users.

"A health care provider is running the same kind of margins as a grocery store, anywhere from one to three percent," Michalek says. "And they're really hurting these days. We can help."