Sweep Up That Paper!

Think you've got problems choosing a health-care plan? Consider Michael Scarpa, benefits manager for the 13,000 U.S. employees of ABB, the power-and automation-technologies giant based in Zurich, Switzerland. Until recently, as contracts expiredevery May, 20 HMOs in 40 states would send in six-inch-thick binders containing detailed bids for ABB's business. Scarpa, 37, and his staff would spend days plowing through the paperwork. Then Scarpa would often pay a consultant as much as $45,000 to analyze the bids for each contract up for renewal.

That all changed earlier this year when Scarpa learned about IE-Engine, a privately held software firm based in Waltham, Mass., that promised to make it easier and cheaper to buy health insurance. IE-Engine set up a pilot program that helped ABB streamline its health-care providers in North Carolina from three to one with no reduction in quality of care. The system enabled Scarpa and his staff to make that decision in half the time it would have taken before. From the receipt of bids to the comparative analysis, the entire process was handled via the Internet. The binders disappeared, as did the pricey consultants. Scarpa is negotiating a long-term contract with IE-Engine that he estimates will save 20% in costs.

Benefits managers like Scarpa are falling in love with Internet-based procurement software--and asking where it's been all their lives. For years, companies have used the Net to obtain bids for everything from paper clips to laptops and industrial chemicals. Yet buying health care has remained an archaic, labor-intensive and costly process. Both employers and providers have treated health care as too complex and variable to be put up for online bids. As auction software has become more sophisticated, though, companies are using it to award gnarly contracts for relocation, travel and other complicated services. Today these tools are also being adapted to the health-care market by a handful of firms led by IE-Engine. Its software and services, which cost $200,000 to $700,000, achieve savings by increasing speed and efficiency and by loosening the grip on prices held by the chummy network of providers, brokers and consultants on which most corporate insurance buyers have had to rely.

Taking on that establishment is John McMahon, 47, CEO of IE-Engine, a sourcing-software specialist who once worked for auction-technology firm Ariba and networking giant Cisco Systems. His year-old start-up counts as customers Dow Chemical, Ford, Lucent, Owens Corning and Staples. "The fact that these creme de la creme companies have signed up validates the idea," says Lou Volpe, 52, a partner at Kodiak Ventures, which has invested $6 million in IE-Engine.

U.S. companies spend about $600 billion a year on health care and other employee benefits--a pot of gold that is attracting rivals to IE-Engine's niche. BenefitPoint, based in San Francisco, offers Web-based sourcing of employee benefits but keeps brokers in the loop. FreeMarkets, a $167 million sourcing-software firm based in Pittsburgh, Pa., moved into the health-care business eight months ago, placing more than $1 billion in contracts.