Title: Christopher Brown Associate Professor of Economics Arkansas State University Ted Lee Assistant Profe
1Oligopsony Power, Information Technology, and
SystemsIntegration The Case of the Healthcare
Supply Industry
Christopher BrownAssociate Professor of
EconomicsArkansas State UniversityTed
LeeAssistant Professor of MISArkansas State
University
2Introduction
- The objectives of the paper are
- To provide a descriptive account and analysis of
the use of information technology to achieve
tighter systems integration in the healthcare
supply industry. - To examine the importance of oligopsony power in
stimulating the diffusion of of electronic data
interchange (EDI) and automated data capture
(ADC) by units operating at different stages of
the healthcare supply chain.
3Structure of the Healthcare Supply Industry
- 808 billion spent for personal healthcare in
1995a - 83 billion accounted for by products and
services. - Healthcare supplies include surgical instruments,
sterilization products, wound care supplies,
needles, syringes, adhesives, bandages, sponges,
gloves, heat/cold therapy kits, fluid collection
systems, and supplies for dialysis, cardiology,
and anesthesiology. - Definition does not include prescription and
over-the-counter drugs
aSource CSC Consulting
4The Healthcare Supply Chain
Providers
- Acute care
- Physicians offices
- Long-term care
- Home care
- Integrated healthcare
Source EHCR Supply Chain Study (1996).
Distributors
- Wholesale distribution
- Just-in-timedelivery of custom kits
- Cost consulting
Manufacturers
Medical surgicalsupplies
Key Firms3M HealthcareAbbot LaboratoriesBeckton
-DickinsonJohnson JohnsonSandoz Nutrition
Key FirmsAllegiance HealthcareGeneral
MedicalMcKessonOwens and MinorPhysician Sales
and Services
Key FirmsColumbiaApria HealthcareKaiser
PermanentePremier, Inc.VHA, Inc.
5Woolfe's Levels of Value-Chain Integration
www.wentworth.co.uk (8 March 1999)
- ? Woolfe distinguishes among three levels of
value chain integration. - Tight
- Close
- Loose
Electronic integrationrequires the use of
avalue added network (VAN) or dedicated
telecommunicationsinfrastructure
6Tight Integration
Tight integration is distinguished by the
shared use of a proprietarydatabase by two
ormore legally non-integratedunits. Discount
retailing (andWal-Mart in particular) isthe
best real world example
Mainframe
Data Warehouse
7Close Integration
- Host-integrated electronic data interchange
(EDI) - Joint management of inventory through exchange
of information and forecasts.
We argue thatthe close modelfits best for
downstreaminterstitial relationsbetween
gianthealthcare distributorsand providers
8Loose Integration
- Door-to door EDI
- Orders and invoicesexchanged through EDI
Personal computer
The extant level of systemsintegration
betweenhealthcare distributorsand suppliers is
loose.
9Advantages of size in healthcare distribution
- Giant distributors realize pecuniary economies in
the purchase of specialized telecommunications
services. - By engaging in EDI with a large number of trading
partners, distribution units can spread system
development costs more thinly. - Distributors can leverage their control of shelf
space to force suppliers into compliance with
standards for EDI and automated data capture.
10The Dichotomy of Incentives to Use Information
Technology (IT)
- Whereas the distributors view IT as tool to
improve margins and gain advantage over rivals,
most suppliers view it as a necessary evil. - Many (if not most) suppliers would not use EDI
unless they faced the legitimate threat of
foreclosure from vital distribution networks. - From the point of view of vendors, EDI is
costly, complex, and user unfriendly.
11EDI is a headache for vendors
These ANSIX-12 standards forEDI are
notreallystandardized
- Requires PC, translator software, and high-speed
link to the distributors VAN. - Vendors must design templates to comply with
generic standards selected by the EDI
host(distributor). - Vendor may be besieged with dozens of standard
ANSI X-12 specs.
12The Case of Allegiance Corporation
- Facts about Allegiance
- 4.35 billion in supplies delivered in 1997.
- 1.6 billion in self-manufactured medical
supplies. - 70,000 customers, to which Allegiance delivers
320,000 products annually. - 2,800 product suppliers.
- 49 distribution centers located in 40 cities.
- 6,000 deliveries per day.
- 80 percent of customer orders and 90 percent of
purchase orders sent to vendors are paperless.
13Allegiance has oligopsony power
There is a connection betweenthe concentration
of sales at the distribution stage and the
diffusion ofcost-saving IT throughoutthe
healthcare supply chain.Allegiance is the
bestexample of this phenomenon
- Sources of oligopsony power
- Allegiance controls a substantial share of the
wholesale market for medical supplies--and thus
has the abilityto foreclose distribution
channels to healthcare supply manufacturers - Allegiance consultants recommend shift to Best
Valueproducts as cost-cutting measure.
14Doing business with Allegiance . . .
- . . . requires
- EDI capability
- Compliance with ASC X-12 transaction set number
850 (purchase orders), set number 810 (for
billing), number 856 (advance ship), number 832
(product catalog/price information), and number
845 (contract notification). - Vendors to label products with the Universal
Product Number (UPN) on the label in the format
requested by Allegiance (to enable automated data
capture).
15Summary
- What are the implications of the diffusion of IT
in the healthcare supply field? - Information sharing agreements between large
distributors and manufacturers. - Development of inter-corporate networks made
possible by SAP implementation. - Acquisition and consolidation of small medical
supply companies. - Widespread adoption of cost standards.
- Movement toward web-based EDI using XML.