Relational and contractual governance in hospital-insurer relationships: the case of joint purchasing of expensive medicine

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Relational and contractual governance in hospital-insurer relationships:

the case of joint purchasing of expensive medicine

Master thesis Supply Chain Management

University of Groningen, Faculty of Economics and Business

29 June, 2018

Jurgen van Katwijk S3222675 Email: j.d.van.katwijk@student.rug.nl

Supervisor

PhD candidate, A.C. Noort

Co-assessor Prof. dr. J. de Vries

Second examiner Prof. dr. ir. C.T.B. Ahaus

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ABSTRACT

When insurers and hospitals collaborate to jointly purchase expensive medicine they are able to improve their bargaining position towards the pharmaceutical industry. Insurers and hospitals have a shared interest since they both want to reduce the costs for expensive medicine. In order to successfully collaborate, however, insurers and hospitals first have to improve their relationship which is currently tensed. Our single case study showed that relational- and contractual governance are both important governance mechanisms in the relationship between insurers and hospitals. Both governance

mechanisms have shown that they influence the collaborative relational outcomes in the relation between insurers and hospitals. However, relational- and contractual governance are not properly used yet as the perceived levels of collaborative relational outcomes are still low. The governance

mechanisms needs to be further developed to be able to improve the relationship between insurers and hospitals.

Keywords: Collaboration, Jointly purchasing expensive medicine, Governance mechanisms, Insurers,

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1. INTRODUCTION

The costs of expensive medicines are increasing by a hundred million euro a year in the Netherlands and involved approximately two billion euro in 2016 (Vektis, 2017). The yearly increase of costs for expensive medicine is becoming a bigger part of the healthcare budget as a result of higher medicine demand and high medicine prices (NZa, 2017). This puts pressure on the healthcare budget due to a limited

expenditure growth allowance each year (Tax & Van der Hoeven, 2014). For a long time hospitals have been purchasing medicine themselves in small volumes and therefore possess a lack of bargaining power (Tax & Van der Hoeven, 2014). To strengthen their bargaining power, hospitals can benefit from

collaborations with health insurers (insurers hereafter) as insurers act as connectors between hospitals. In collaborations, two or more organizations are better able to compete than when they are acting in isolation (Nyaga, Whipple, & Lynch, 2010). Relationships between organizations are a key determinant for a collaborations’ success (Gelderman, Jonge, Schijns, & Semeijn, 2016). Let that just be the issue between hospitals and insurers (Dobrzykowski & Chakraborty, 2014). The relationship between insurers and hospitals is characterized by distrust and conflicting interests (NZa, 2016). Insurers have, for

example, insufficient insight on volumes, costs and appropriateness of prescribed medicines by hospitals (Bijlsma, Meijer, & Shestalova, 2008). Literature shows that contractual- and relational governance play an important role in collaboration between organizations (Poppo, Zhou, & Li, 2016; Willem & Gemmel, 2013). However, the importance of both governance mechanisms on relationship outcomes remains unclear (Cao & Lumineau, 2015).

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6 As little is still known about jointly purchasing expensive medicine by insurers and hospitals within a situation of distrust and conflicting interests, this research contributes by providing a better

understanding of the importance of contractual- and relational governance and how contractual- and relational governance influence collaborative relational outcomes between insurers and hospitals to jointly purchase expensive medicine. Therefore, this paper addresses the question:

How do contractual- and relational governance influence collaborative relational outcomes in jointly purchasing expensive medicine between insurers and hospitals?

We address this question by means of a single case study. The context of this research is the pilot of joint purchase of expensive medicine by insurers and hospitals. Within this research we interviewed several employees of insurers and hospitals who are familiar with the process of purchasing expensive medicine. Within the interviews we searched for governance mechanisms and how these mechanisms influenced the collaborative relational outcomes. The rest of this paper is organized as follows. First, in the theoretical background an in-depth description is given on expensive medicine, collaborative relational outcomes and contractual- and relational governance. Next, the methodology is explained. Then, the results are provided and followed by the discussion and conclusion.

2. THEORETICAL BACKGROUND

This chapter starts with an explanation of expensive medicine in section 2.1. Section 2.2 describes the insurer-hospital relationship including the difficulties they are facing. Sections 2.3 explains the concept of collaborative relational outcomes. Contractual- and relational governance are explained in section 2.4 and the chapter closes with a conclusion in section 2.5.

2.1 Expensive medicine

Within this research we follow the definition of “expensive medicine” provided by NZa (Dutch healthcare authority) as used in Hilarius & Daniëls (2016): Medicines which have yearly costs of over ten thousand euro per patient. Pharmaceutical companies are allowed to charge any price for their medicine below the maximum price determined by the WGP (Dutch pharmaceutical prices law). The maximum price in this law is based on a benchmark with medicine prices in Belgium, Germany, France and the United Kingdom (Rijksoverheid, 2015).

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7 if one treatment costs over fifty thousand euro per year or if the total yearly medicine costs exceed forty million euro. In this situation the Minister of Health, Welfare and Sport will negotiate first with the pharmaceutical companies before the medicine is added to the basic insurance package (Rijksoverheid, 2018).

Hospitals in 2017 managed to negotiate lower prices with pharmaceutical companies than the previous year. This is a result of an increase of joint purchasing initiatives of hospitals. However, the expenditure on expensive medicine still grew with 8,4% (NZa, 2017). This is due to introduction of many new medicines (NZa, 2017) and an increase in patients using expensive medicine (Kleijne, 2017) The section above shows that several actions have been taken to reduce the prices of expensive

medicines. Despite the lower negotiated medicine prices by hospitals the Dutch healthcare system is still facing a growth rate of 8,4% in the expenditure on expensive medicine. Still, the total expenditure on healthcare is only allowed to grow yearly with 1,6% (Van Aartsen, 2017). This means that expensive medicines claim a large proportion of that budget. I order to cope with the rising costs of expensive medicines it is possible that other care will be displaced (NZa, 2016)

2.2 Insurer - Hospital relationship

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8 are margins between prices paid by hospitals and reimbursement prices of insurers for some medicine, but hospitals use them to compensate for shortcomings on other medicine (NZa, 2016). During the budget negotiations insurers focus on lower budgets. The cost focused negotiations result in situations where hospitals receive for some medicines a reimbursement price above their purchasing price and for others a reimbursement price below their purchasing price (NZa, 2016).

The nationally agreed limited expenditure growth rate puts pressure on the negotiations and

relationship between insurers and hospitals (Schäfer et al., 2010). Lower medicine prices can release the pressure, but to do so insurers and hospitals need to collaborate to strengthen their bargaining position towards the pharmaceutical industry (Lavikka, Smeds, & Jaatinen, 2015). In 2018, a pilot started during which insurers and hospitals jointly purchase expensive medicine (NZa, 2017). However, it is unknown how the problematic relationship affects the collaborative relational outcomes. By studying contractual and relational governance mechanisms we seek to improve our understanding of this relationship.

2.3 Collaborative relational outcomes

For this thesis we use trust, loyalty and shared interests as collaborative relational outcomes to explain the collaboration between insurers and hospitals (Yawar & Seuring, 2017; Zacharia, Nix, & Lusch, 2009). Trust is an important element in relational exchanges as it focuses on the extent to which organizations are willing to depend on each other (Sheng, Brown, Nicholson, & Poppo, 2006). Doney & Cannon (1997) argue that higher levels of trust enable organizations to focus on the benefits of long-term relationship. Trust develops through continuous interaction between organizations (Shapiro, 1987). Loyalty reflects the desire to endure and continue a relationship with the other organization (Sheng et al., 2006). The level of loyalty is affected by relationship practices (Rauyruen & Miller, 2006). Shared interests exist between organizations when they are holding similar business norms and values (Sheng et al., 2006). Shared interests develop through shared goals and an ongoing process within the relationship between organizations (Krause, Handfield, & Tyler, 2007).

There have been initiatives in jointly purchasing expensive medicine in the past between insurers and hospitals. Insurer Achmea collaborated with 12 hospitals to jointly purchase TNF-alpha-inhibitors. One reason that hospitals did not participate was that the choice for a medicine is between physicians and patients and not between insurer and patient (PW, 2014).

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9 Contractual- and relational governance are mechanisms that assist in describing and better

understanding the relationship between insurers and hospitals (Cannon, Achrol, & Gundlach, 2000; Lumineau & Henderson, 2012). Both, contractual- and relational governance, will be studied in relation to collaborative relational outcomes because they both play a key role in collaborations (Cao &

Lumineau, 2015).

2.4 Contractual- and relational governance

Governance mechanisms are referred to as “safeguards that firms put in place to govern

interorganizational exchange” (Burkert, Sven, & Shan, 2012, p. 544). The next sections explain

contractual- and relational governance further. 2.4.1 Contractual governance

Contractual governance is the use of formal contracts that bind organizations to carry out required actions (Blomqvist, Hurmelinna, & Seppänen, 2005). Contracts also set parameters for agreements on volume, price and quality (Huang, Cheng, & Tseng, 2014). The purpose of contractual governance is to contribute to establishing long-term relationships between organizations (Blomqvist et al., 2005). The contract and the contracting process assist organizations in making their assumptions and expectations explicit regarding the transactions and each organizations role (Malhotra & Lumineau, 2011). The specification of obligation, promises and processes within contracts are greater for more complex contracts (Poppo & Zenger, 2002). Joint rules are a prerequisite in order to achieve the mutual goals within contractual governance (Blomqvist et al., 2005). Huang, Cheng and Tseng (2014) state that monitoring the agreements should take place to be able to succeed. Monitoring is used with the aim to ensure that the other organizations act in accordance with the desires and expectations (Lumineau & Henderson, 2012). There are two types of monitoring: process- and outcome control. Process control governs the actions whereas outcome control measures the consequences (Ju, Murray, Kotabe, & Gao, 2011). An advantage of contractual governance is that it has the ability to reward and sanction partners’ behavior and it protects against opportunistic behavior of other organizations (Cao & Lumineau, 2015). A disadvantage of contractual governance is its inflexibility to adjust to environmental changes (Huang, Cheng, & Tseng, 2014).

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10 provided if hospitals meet certain quality norms. Certain protection measures as taken in forms of monitoring and fines (Ruwaard, Douven, & Struijs, 2014).

2.4.2 Relational governance

Sheng, Brown, Nicholson and Poppo (2006, p. 65) define relational governance as “a mechanism in which

interorganizational exchange is regulated through a set of norms that circumscribe acceptable behavior between exchange partners”. We focus on three dimensions of relational governance as suggested by

Whipple et al (2010): information sharing, joint relationship effort and dedicated investments.

To get a better understanding of the three relational governance activities they are explained further. First, information sharing is crucial if both organizations want to realize benefits from the collaboration (Nyaga et al., 2010). Information sharing refers to the degree that critical information is communicated with the partner organization (Mohr & Spekman, 1994). Currently, insufficient information is shared between hospitals and insurers regarding volume (Bijlsma et al., 2008). Second, joint relationship efforts are required for collaborations to succeed (Nyaga et al., 2010). Joint efforts relate to joint goal setting, planning and problem solving (Min et al., 2005). Both hospitals and insurers have the same goal being paying less for medicine (NZa, 2015). However, up to now they have been unable to find solutions for their conflicting interests. To do so, they should align their conceptions on the quality of care and the quality-cost balance (Maarse, Jeurissen, & Ruwaard, 2016). Lastly, dedicated investments are

investments made dedicated to a collaboration between organizations (Heide & John, 1990). Dedicated investments increase the credibility of organizations, shows that organizations care for the relationship and that they are willing to make sacrifices (Nyaga et al., 2010). Negotiations between insurers and hospitals are always difficult since they both want to get the best deal (Loozen, Varkevisser, & Schut, 2016).

2.5 Conclusion theoretical background

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11 Contractual governance mechanisms focus on the formal aspects of the relation such as contract.

Relational governance mechanisms focus on the social aspect of the relationship.

In the next section we will explain the case study that was set up from the problem that we have studied below.

3. METHODOLOGY

3.1 Study Context

With the introduction of the Health Insurance Act (Zvw) in 2006 the Dutch healthcare system

transformed from a centralized government control system to a decentralized system with regulated competition among healthcare actors (KPMG, 2014; Schäfer et al., 2010). The aim was to improve the healthcare system with a main purpose of increasing the quality, accessibility and affordability of care in the Netherlands (KPMG, 2014). The role of the government has shifted from directly controlling prices, volumes and productive capacity towards setting the rules for the new healthcare system and controlling whether the markets are properly working (Schäfer et al., 2010). Within this system insurers have to compete for customers and providers have to compete for contracts with insurers (Maarse et al., 2016). This new system is depicted in Figure 3.1 and shows that insurers, providers and patients are the main actors in the current Dutch healthcare system. In this thesis we focus on the collaboration between insurers and providers and thus the healthcare purchasing market.

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12 This thesis is aimed at the pilot “Collaboration Purchasing Expensive Medicine” where hospitals and insurers jointly purchase expensive medicine. This pilot involves all academic hospitals, over 40

nonacademic hospitals and all insurers within the Netherlands. These organizations are represented in a pilot-workgroup by their own union. Academic hospitals are represented by the NFU (Dutch Federation of University Hospitals), nonacademic hospitals by NVZ (Dutch Associations of Hospitals) and insurers by ZN (Health Insurers Netherlands). Together they possess a market share over 85% (Benraad, 2017).

3.2 Research design

The main purpose of this research was to obtain a better understanding of the importance of

contractual- and relational governance and how they influence the collaborative relational outcomes between insurers and hospitals to jointly purchase expensive medicine. This research was conducted by executing a single case study with embedded units. Embedded units involve multiple units of analysis within a single case study which enabled us to explore the case from several perspectives (Baxter & Jack, 2008). Despite the limited generalizability, single case study allowed for greater in-depth observations and it is recommended to answer “how” questions (Voss, Tsikriktsis, & Frohlich, 2002). A single case study was performed in particular because this case represents a unique case since it is the first time that a pilot on jointly purchasing expensive medicine is performed on this scale (Yin, 2009).

3.3 Case selection

The unit of analysis in this case study is the hospital-insurer relationships. However, within this case attention was also paid to subunits which means that there are multiple units of analysis (Yin, 2009). This enabled us to explore the case from several perspectives (Baxter & Jack, 2008). All units focused on the hospital-insurer relationship. However, the hospital-insurer relationship was explored from different perspective. Units were selected based on the following criteria; organizations had to be a nonacademic hospital or an insurer and whether or not these organizations were directly involved in the pilot of joint purchasing expensive medicine. This resulted in the units as depicted in Table 3.1. This means that there was one unit with directly involved nonacademic hospitals, one unit with indirectly involved

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13 Nonacademic hospital or insurer Directly involved in pilot

Unit A Nonacademic hospitals Yes

Unit B Nonacademic hospitals No

Unit C Insurers Yes

Unit D Insurers No

Table 3.1 Unit selection

3.4 Data collection

Semi-structured interviews were conducted between the 18th of April and the 28Th of May as the main data collection method. Within each unit multiple interviews were conducted as can be seen in Table 3.2 in order to decrease the observer bias and contributed to external validity. Interviewee’s were

approached by phone, email and/or LinkedIn. The interviews were held together with a colleague student where one took the leading interview role and the other took notes. An interview protocol (see appendix A) was used for the interviews. This protocol consisted of two sections; a part on general information and a part on the influence of relational- and contractual governance on collaborations between hospitals and insurers. Before the interviews, an introduction letter was sent to ensure that the interviewee was well prepared (Voss et al., 2002). The interviewees also had to read and sign a consent form (see Appendix B) to ensure they fully understood the purpose of the interviews and how their answers were processed. If the interviewee agreed, the interview were recorded. The interviews consisted of semi-structured questions. The interviews lasted between 35 and 60 minutes. Each interview was transcribed within 24 hours after completion of the interview. This was done to increase the construct validity. The transcribed interviews were sent to the interviewee to review them (Yin, 2009). Since Dutch is the native language of the interviewees, the interviews were conducted in Dutch. Interviewees may not feel comfortable speaking in English which could have influenced the richness and completeness of the data.

Table 3.2 Details interviews

To achieve triangulation, we have also made use of secondary sources to support and/or supplement the collected data from the interviews (Eisenhardt, 1989). These sources included the webpages of all organizations, annual reports, the guideline for jointly purchasing medicine for medical specialist care of

Hospital A Hospital B Hospital C Hospital D Insurer A Insurer B Insurer C Insurer C Insurer D Insurer E

Position interviewee Hospital pharmacist Manager procurement & logistics Hospital pharmacist Manager medical specialist care Account manager Purchaser medical specialist care Employee insurer Intelligence analist Policy coordinator Care Senior manager care purchasing Interview

duration 52 min. 49 min. 55 min. 55 min. 45 min. 58 min. 59 min. 50 min. 58 min. 40 min.

Unit A Unit B Unit C Unit D

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14 Consumer and Market Authority (ACM) and presentations with the first results of the pilot of jointly purchasing expensive medicine.

3.5 Data analysis

The data gathered from the interviews was coded and analyzed by making use of ATLAS.ti 8.2. To code the data the coding scheme of Strauss and Corbin (1990) was used since. This scheme consists of three steps. First, was open coded. Here, data was fragmented or separated and the data was given detailed labels. Second, axial coded was used. The purpose of axial coding is to regroup and connect categories together in a rational manner. Last, selective coding was applied where core categories were related to other categories (Voss et al., 2002). An example on a coding tree can be found in Appendix C. Table 3.4 shows the definitions which are used for the (sub)categories. These categories were deductively derived from the previously discussed theory. However, one new categories were added based on the input of the interviewee’s; transparency. This inductively derived variable was added to the deductive variables. To analyze the data, two steps as suggested by Eisenhardt (1989) were

followed: within case analysis and between cases analysis. These analysis were made by making use of spider webs as can be found in Figure 4.2 to Figure 4.4. The spider webs were made by giving scores to the codes in the coding tree (see Appendix C). Table 3.3 depicts the scores that were given to each code and their meaning. The averages were taken of the scores for each unit and rounded to the nearest number.

Score Presence 0 Not present 1 Somewhat present 2 Present 3 Above present 4 Highly present

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Collaborative relational outcomes

 Trust Believing that the other acts in your interest

 Loyalty The willingness to participate in the pilot for a longer period  Shared interests Having similar- and conflicting interests

Contractual governance

 Contracts Formal written documents that obliges organizations to carry out certain tasks

 Rules for joint purchasing

The rules insurers and hospitals have to comply to be able to jointly purchase medicine

 Monitoring Monitoring of agreements

Relational governance

 Information sharing The amount of information shared and the type of information shared

 Joint relationship efforts The effort put in the pilot by all organizations

 Dedicated investments Investments made for the pilot such as time and capacity

Newly derived category from interviews

 Transparency Showing the other organization what you are doing

Table 3.4 Definitions (sub)categories

4. RESULTS

4.1 The context: Pilot joint purchasing expensive medicine

Medicine within the healthcare market can be divided into four categories. This pilot focuses on one cluster of three oligopolistic medicine treating chronic myeloid leukemia with a budget of 30 million euro. These medicines are prescribed by 75 hospitals who together cover 98% of the total Dutch hospital market. When a medicine is oligopolistic it means that there are multiple variants which are

interchangeable resulting in competition between pharmaceutical companies.

The initiative to start jointly purchasing expensive medicine was taken by the boards of hospitals and insurers together which has resulted in a collaboration between NVZ, NFU and ZN. The organization of the pilot is structured as depicted in Figure 4.1. On top there is the steering committee with mandated board members from NVZ, NFU and ZN. Each associations has its own program manager who has a seat in the working group. Besides the program managers there are also pharmacists and purchasing

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16 program managers at their turn direct the working group. The program managers and hospital

representative’s together prepare the cases and select clusters to jointly purchase expensive medicines for. Then there is an execution team who is responsible for directing the purchasing round and

translating contracts for individual participating hospitals. At the bottom there is a purchasing team consisting of representatives from hospitals who are responsible for the negotiations. There are no insurer representatives involved in the purchasing group to keep purchasing prices classified for the insurers. Pharmaceutical companies might stop to providing discounts when insurers become aware of the negotiated prices between hospitals and pharmaceutical companies. When insurers are aware of the negotiated prices between hospitals and the pharmaceutical companies they will eventually reimburse a lower price which decreases the revenue of pharmaceutical companies.

At the start of the pilot a group of interchangeable medicines was selected by the working group. Then, the professional group with physicians was consulted whether they agreed and whether or not they would advise to select one medicine as preferred medicine based on the price negotiations. After approval of the professional group the purchasing team approached the pharmaceutical companies of the three medicines to request purchasing prices for a situation in which 75% of the new patients are prescribed to the medicine.

Steering group:

Determine policy and directs workgroup

•Two board members from NVZ (Dutch Association of Hospitals), NFU (Dutch Federation of University Medical Centers) and ZN (Health insurers Netherlands)

•Two representatives from the offices NVZ and NFU •Program managers NVZ, NFU and ZN

•Secretary

Working group:

Preparing cases by translating policy to

actions

•Program manager NVZ, NFU and ZN •2 pharmacists NFU and NVZ

•1 purchaser medical specialist care ZN •1 purchaser medicine NFU and NVZ •Pharmacists

•Secretary

Execution team:

Direct purchasing round and translate contract

for individual participants

•Pharmacist NFU from working group •Pharmacist NVZ from working group •Data-analyst

•Official secretary: Purchasing coordinator from iZAAZ

Purchasing team:

Negotiate with pharmaceutical companies for contracts

•Official secretary: Purchasing coordinator from iZAAZ •Purchaser academic hospital

•Medical specialist

•Hospital pharmacists from NFU and NVZ

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17 In the above section the context of this research was outlined by explaining the pilot of jointly

purchasing expensive medicine by insurers and hospitals. The next section presents the results of the relationship between insurers and hospitals by the means of three concepts; contractual governance, relational governance and collaborative relational outcomes. The last two sections shows how contractual- and relational governance influence collaborative relational outcomes.

4.2 Contractual governance

We found three forms of contractual governance in the relationship between insurers and hospitals. These forms are contracts, rules for joint purchasing and monitoring. Contracts focus on the importance of contracts between insurers and hospitals whereas rules for joint purchasing focus on the rules within the pilot that organizations need to comply to. Figure 4.2 shows how strong a certain form is perceived by a unit.

Figure 4.2 Contractual governance. 0 is not present, 4 is highly present.

4.2.1 Contracts

Figure 4.2 shows that contracts are, according to all organizations, extremely important for the relationship between insurers and hospitals as they form the basis for the relationship between them. However, there are small differences between units. Relationships between insurers and hospitals involve millions of euros, so it is of importance that each organizations knows what is agreed upon. For hospitals contracts determine the amount of care that can be delivered, at which costs and against which conditions. For insurers the contract determines whether or not they can fulfill their duty of care and against which costs. In practice, insurers and hospitals always need to agree on a contract and are

0 1 2 3 4 Contracts Rules for joint purchasing Monitoring

Unit A (hospital, directly involved)

Unit B (hospital, indirectly involved) Unit C (insurer, directly involved)

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18 thus strongly dependent. If hospital do not have a contract they are missing revenue. Insurers have a duty of care and if there is no contract with a hospital their patients might have to travel further or pay an amount of the treatment themselves.

Regular ‘ceiling budget’ contracts involve a maximum number of treatments a hospitals can perform. If hospitals produce more they will not get paid for those treatments. Within the pilot there is no

maximum number of new patients that hospitals are allowed to prescribe on the preferred medicine, so hospitals get all the medicines reimbursed. This means that there is apart from the regular contract a more flexible arrangement on the prescription of the preferred medicine. This indicates that contracts play a smaller role within the pilot.

4.2.2 Rules for joint purchasing

Besides the regular contracts additional rules were prepared by the steering committee that hospitals and insurers have to comply to in order to join the pilot. Figure 4.2 shows that organizations are aware that the rules are there, but they do not experience them as compelling as contracts. The rules state that all participating organizations behave decent, participate for the whole run, monitor how their own hospital is performing and that the board of directors addresses the behavior of their doctors. Besides the rules about their behavior there is also a rule about the prescription of the medicines. The purpose of this pilot is that all participating hospitals prescribe at least 75% of their new patients on the preferred medicine. If hospitals prescribe exactly 75% of the new patients on the preferred medicine they get the price reimbursed that was negotiated between the purchasing group and the pharmaceutical company. If hospitals prescribe a higher percentage they get a higher price reimbursed, so they make a small profit and in case of prescribing fewer patients they get a lower price reimbursed, so they make a small loss.

4.2.3 Monitoring

Normally monitoring is done based on the reimbursement data of hospitals. However, this data is often delayed. Only 85% of the data over 2017 is available for insurers till now. Therefore, monitoring how often hospitals prescribe the preferred medicine to new patients is supposed to be done by means of a questionnaire. This questionnaire involves questions about the number of new patients that are

prescribed to the three interchangeable medicines. However, Figure 4.2 depicts that the units that are directly involved experience the monitoring as more positive than organizations that are indirectly involved. The organizations that are indirectly involved do not know whether the monitoring already is taking place and how it is done. This suggests that the monitoring is not executed properly yet.

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19 75% is prescribed on the preferred medicine. It is essential for the future of this pilot that this

percentage is achieved because it will affect next year’s negotiations. In the situation that this

percentage is not achieved the pharmaceutical companies cannot trust that insurers and hospitals fulfill their promises and may not provide a discount next year.

4.3 Relational governance

We found three forms of relational governance in the relationship between insurers and hospitals. These forms are information sharing, joint relationship efforts and dedicated investments. Figure 4.3 shows how strong a certain form of relational governance is present in a unit.

Figure 4.3 Relational governance. 0 is not present, 4 is highly present

4.3.1 Information sharing

Figure 4.3 depicts how much information is being shared by the different units. As can be seen units A and C, who are directly involved in the pilot, share more information than the units that are indirectly involved. The main information that is being shared between all parties is reimbursement data which is also shared during the regular relationships. Reimbursement data shows on a detailed level which patient receives which medicine, for which indication, during which time period and the packaging. Regularly, insurers share with hospitals how well they are performing compared to other hospitals, but they are unable to do so during this pilot because the prescriptions of new patients on the preferred medicine are barely monitored.

For the indirectly involved organizations it is of importance that the directly involved organizations share information about how the processes are designed and what is agreed upon. However, the directly

0 1 2 3 4 Information sharing Joint relationship efforts Dedicated investments

Unit B (hospital, indirectly involved)

Unit C (insurer, directly involved)

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20 involved units are lacking to share this information. Indirectly involved organizations have to request information if they have insufficient knowledge about a procedure.

4.3.2 Joint relationship efforts

To be able to participate, the board of directors of each organization had to sign an agreement. Together they have the shared goal to reduce the prices of expensive medicine. However, this did not results in an equal contribution of each organization into this pilot as shown in Figure 4.3. The pilot is structured in a manner which results in a situation in which certain organizations contribute more than others. The directly involved organizations discuss new clusters of medicine to jointly purchase or negotiate purchasing prices with pharmaceutical companies. The efforts of the indirectly involved organizations are limited to sharing their volumes and requesting information about procedures.

4.3.3 Dedicated investments

Figure 4.3 shows for each unit the level of investments that have been made for this pilot. It is noticeable that the units which are directly involved in the pilot make the most dedicated investments. Except for unit B, all other units have made investments to support this collaboration. The main investments that have been made by the organizations that are directly involved are time and capacity. The time each of these organizations invests in this collaboration depends on the size of the organization. This means that bigger organizations have to invest more time than smaller organizations. However, not all organizations are able to invest the time they should actually been spending on this pilot. This is caused by the fact that the involved employees participate in this pilot besides their regular job. Investments on capacity have only been made on the directly involved insurers side. However, there are also plans on the side of directly involved hospitals to hire additional staff.

4.4 Collaborative relational outcomes

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Figure 4.4 Collaborative relational outcomes. 0 is not present, 4 is highly present

4.4.1 Trust

Trust is perceived as the most important aspect of the collaboration of jointly purchase medicine between insurers and hospitals. Asked about what is the most challenging aspects of this relationship, multiple interviewee’s answered with trust. As shown in Figure 4.4 the overall level of trust between hospitals and insurers is low. It is said that working together contributes to higher levels of trust. This causes the difference between the levels of trust between directly and indirectly involved units. Directly involved organizations have regular meetings where they discuss the issues encountered whereas indirectly involved organizations do not participate in those meetings. Based on their statement that working together contributes to higher levels of trust

4.4.2 Transparency

Transparency within this pilot is important for its success. However, Figure 4.4 shows that the level of transparency is low. There are several issues regarding the low level of transparency. First, indirectly involved organizations are unaware of the main goal being establishing a shift in the market rather than achieving financial results this first year. Second, 75% of the new patients should be prescribed on the preferred medicine. The number of new patients prescribed on the preferred medicine was supposed to become transparent by monitoring the prescription of new patients on the preferred medicine. Last, insurers would like to know the margins hospitals have on the purchasing price of medicine. However, hospitals are not willing to share the purchasing prices during regular contract negotiations due to non-disclosure agreements. However, there is only one hospital, hospital D, that is willing to share the purchasing prices of medicine. Hospital D is aware that pharmaceutical companies do not appreciate it,

0 1 2 3 4Trust Loyalty Shared interests Transparency

Unit B (hospital, indirectly involved) Unit C (insurer, directly involved)

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22 but they try to find a way that comforts those pharmaceutical companies. It is also difficult to be

completely transparent about purchasing prices due to additional conditions negotiated with pharmaceutical companies. Pharmaceutical companies might, for example, sponsor a research if a certain medicine is used instead of providing higher discounts. Within the pilot it is forbidden to share prices due to rules drawn up by the Consumer and Market Authority (ACM). The rules are established by ACM to protect the competitive position of pharmaceutical companies.

4.4.3 Loyalty

Figure 4.4 shows the loyalty of the units towards the pilot. As can be seen, unit B, with indirect involved hospitals, is the least loyal within the pilot. This is due to the dilemma they are facing. Hospitals purchase multiple medicines from one pharmaceutical company and if hospitals decide to completely join the pilot it will affect the relationship with the pharmaceutical company and its prices on the other medicine. Not fully joining the pilot will affect the success of the pilot. The other units have a wider view and focus on the national healthcare expenses in the Netherlands whereas the organizations in Unit B also focus on the short term.

Insurers and hospitals are becoming more loyal in their regular relationship. This is shown in the

movement from annual contracts to multi-year contracts between both organizations. Benefits are that insurers and hospitals do not have to negotiate each year again. This provides both parties with more certainty.

4.4.4 Shared interests

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4.5 Relationship between contractual governance and collaborative

relational outcomes

In this section, we examine the relationship between contractual governance and collaborative relational outcomes. We found two main problems with respects to the relationship between contractual

governance and collaborative relational outcomes. These problems are: Tte design of the pilot and the feeling of hospitals of not being treated fairly.

The first issue within jointly purchasing expensive medicine is the design of the pilot. There are only a few hospitals and insurers directly involved while the Dutch healthcare system encompasses many more organizations. There are therefore many organizations that are not directly involved. This causes that there is a gap between the perspective of directly and indirectly involved organizations on the process of jointly purchasing expensive medicine. At least 75% of the new patients need to be prescribed on the preferred medicine within the pilot. Not achieving this percentage will impede future negotiations for similar agreements. However, due to the design of the pilot it is not clear how monitoring is supposed to be done. Insurers C, on the one hand, says “we sent monthly, or now after the first three months a

questionnaire to the hospitals and ask them about the patients prescribed on the three medicine on 1 January and 31 March”. Insurer E, on the other hand, says “We have introduced a monitor together which means that hospitals have to deliver monthly data (…) I do not have the feeling that the monitoring process is starting up”. Problems with monitoring are expected to result in a lack of transparency

because hospitals and insurers are not aware of how many new patients have actually been prescribed on the preferred medicine. Therefore it is also not possible to steer the situation in the right direction if not sufficient number of patients have been prescribed to the preferred medicine yet. Involving the indirectly involved organizations more would increase their knowledge about monitoring the amount of new patients prescribed to the preferred medicine. This would provide a clear overview of the

percentage of new patients that have been prescribed to the preferred medicines and enables for adjustment if insufficient patients have been prescribed to the preferred medicine. This results in the following proposition:

P1. The monitoring process improves when more organizations are directly involved. This results in more transparency as an outcome.

The second issue is that hospitals do not have the feeling to be treated fairly. “It could be that

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Thereafter, insurers tell hospitals that it is possible to negotiate a large discount (…) That is unfair because a medicine can become a bleeder when the purchasing price is above the reimbursement price”

(Hospital A). This situation is caused by the regular contract negotiations where the conflicting interests between insurers and hospitals predominate the shared interest of treating patients well. Insurers also admit that hospitals are not always treated fairly. “Sometimes hospitals have comments that we also

know, ok, maybe the prices we offer are a bit too low or it is such a large sales post that we see that it can cause problems” (Insurer D). This is already expressed in the regular contract negotiations. The focus

of the contract negotiations is mainly focused on costs. “Especially near the end of the contract

negotiations it is not about content anymore, but just a few grand more or less” (insurer E). This shows

that near the end of the contract negotiations that the interests of the patients are lost out of sight and that insurers want to reduce costs. This does not contribute to higher levels of trust between insurers and hospitals. However, the shift to the more flexible prescription method of the pilot might result in higher levels of trust because there is no limit on the number of new patients that can be prescribed on the preferred medicine. This results in the following proposition:

P2. The type of contract and contract negotiations influence the level of trust and shared interests. Cost focused contract negotiations have a negative influence on the level of trust and shared interests whereas more flexible prescriptions might result in higher levels of trust and shared interests.

4.6 Relationship between relational governance and collaborative

relational outcomes

In this section, we examine the relationship between relational governance and collaborative relational outcomes. We found two main problems with respects to the relationship between relational

governance and collaborative relational outcomes. These problems are: the relationships that hospitals have with the pharmaceutical companies and insufficient capacity to run the pilot.

One problem that arises within jointly purchasing expensive medicines with respect to relational governance and collaborative relational outcomes is the relationship that hospitals have with pharmaceutical companies. Hospitals often purchase multiple medicines from one pharmaceutical company and joining a pilot for jointly purchasing expensive medicine can affect the relationship between hospitals and pharmaceutical companies. “Tying practices are forbidden (…) However, if a

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have to make clear that it can have consequences for the rest of your medicines” (Hospital D). Hospitals

are therefore in a in a dilemma of whether or not to completely focus on the pilot. Completely focusing on the pilot affects the relationship with the pharmaceutical company and its prices for other medicines whereas not completely focusing on the pilot affects the initiative of jointly purchasing expensive medicine. Mainly hospital that are indirectly involved face this dilemma. The directly involved hospitals have made investments in this pilot and also put efforts in the pilot to try to make it succeed. It is therefore less likely that the directly involved hospitals prioritize their relationship with the

pharmaceutical companies because it would be a waste of resources to not completely join. As hospital A says “The point is that we show, for the first time, that if you collaborate as insurers and hospitals that

we can break through the power of pharmaceutical companies” . This shows that it is more important for

the directly involved hospitals to completely focus on the pilot and try to achieve a shift in the market rather than focusing on the relationship with pharmaceutical companies. This results in the following proposition:

P3. The more dedicated investments made and effort put in the pilot reduces the dilemma that hospitals face of whether to completely join the pilot or not. Higher dedicated investments and efforts result in loyalty towards the pilot which increases the probability that the pilot will succeed.

Another problem is the available capacity to run this pilot. The pilot was set up by volunteers who also had their regular job besides the pilot. This has resulted in a situation in which the indirectly involved organizations were missing information. Asked about what made this pilot so difficult, Insurer E answered: “The lack of information. Basically the whole chain of information”. The indirectly involved organizations had to send a request if they needed information. Hospital A’s explanation for this is “I am

unable to spend the time I should be spending and communication is one of the first things you drop because it is less important between quotations marks”. There is not sufficient capacity to provide

everyone with the information they need. This has resulted in differences in expected outcomes between organizations. The purpose of this pilot was to be able to achieve a shift in the market.

However, the indirectly involved hospitals are more focused on the financial outcomes. “It will just yield

a symbolic discount” (Hospital C). Insurer D, however, says “(…) if you do not exactly achieve the desired results it also ways good to think about it, but that does not have to mean that it does not work. There are still starting up problems, but that needs time”. To formalize further and improve the information

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so we also have a look at our own costs and these costs mainly involve personnel costs” (Insurer E).

Nevertheless, there are actual plans to hire additional staff which shows that there is believe that the pilot can succeed. This results in the following proposition:

P4. Potential success of the pilot depends on the willingness to invest in additional staff. Additional staff can improve the information provision which results in higher levels of trust as all organizations are aware of the issues within the pilot.

5. DISCUSSION

As shown in the previous section, it turns out that the collaborative relational outcomes are influenced by several forms of contractual- and relational governance. This section discusses how the different forms of relational- and contractual governance are linked to each other by focusing on positive aspect and difficulties within the relationship between insurers and hospital.

The positive aspect of the collaboration between insurers and hospitals is that they both want to achieve lower medicine prices by collaborating. However, there are several issues which makes the process of jointly purchasing expensive medicines by insurers and hospitals difficult. Nevertheless, there are also starting points for potential improvements. The lack of understanding by indirectly involved

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27 Another issue is that the skewed distribution of relationship efforts between organizations also makes the process of jointly purchasing expensive medicines by insurers and hospitals more difficult. The indirectly involved organizations were not involved enough to feel bonded towards the pilot. This also led to challenging contract negotiations because the focus of organizations is too much on their own interests. Involvement of more organizations could increase the support for the pilot as it may develop a better understanding for each other’s views.

Within the healthcare literature several papers have been written that can assist to reflect on our findings. The finding that information sharing is important within collaborations between insurers and hospitals is in line with the paper of Dobrzykowski & Chakraborty (2014). Dobrzykowski & Chakraborty (2014) state that, in a healthcare setting, information sharing from the beginning of a collaboration is essential. Not merely for the decision-making process, but also to bind organizations to the

collaboration. The finding that many organizations do not feel bonded to the pilot of jointly purchasing expensive medicine by insurers and hospitals can be explained by the structure of the pilot. There are only a small number of organizations directly involved. Gobbi & Hsuan (2015) argue that the structure and the nature of a collaboration is critical for alignment between purchasing organizations. Within this pilot too little organizations are directly involved which could have resulted in excluding experts. Furthermore, our findings shows that several forms of relational- and contractual governance can reinforce each. This is in line with Cao & Lumineau (2015) who argue that relational- and contractual governance are complements of each other rather than substitutes.

6. CONCLUSION

This study questioned the importance of relational- and contractual governance and how both governance mechanisms influence collaborative relational outcomes in insurer-hospital relationships within the context of jointly purchasing expensive medicine. In order to be able to answer this question we conducted a single case study with embedded units. This provided the opportunity to study the context in-depth.

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28 have a negative influence on the collaborative relational outcomes. Next to that, the different forms of relational- and contractual governance have the ability to complements each other which can positively influence the collaborative relational outcomes. However, both governance mechanisms are not used in a manner that uses their full potential. The main issue for this is the design of the pilot. There are too many organizations that are indirectly involved who do not know what is going on. There is also insufficient capacity available which hinders the development of the relationship and the use of both governance mechanisms.

6.1 Limitations and further research

Despite doing our best to provide a valid and reliable research there are still some limitations. The first limitation is that academic hospitals also participate in the pilot of jointly purchasing expensive medicine. Thus, they are also a party in the relationship. However, due to limitations in access we were unable to conduct interviews within academic hospitals. For this research it means that we were unable to take the perspective of academic hospitals into account. Additional research should be conducted which includes the perspective of academic hospitals. A second limitation is the scoring of the codes to make the spider webs. The scoring is done by one person, so it is still subjective. Further research should collect

additional quantitative data to complement the findings in this research. A third limitation is that this research is conducted during the first half year of the pilot. Longitudinal research should be performed to research the development of the relationship over time.

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Appendix A: Interview protocol

Details to provide before the start of the interview to the interviewee (4 min)

- Introduction of ourselves (name & education). Since it is hard to find interviewees, we pool interviews. The interview consists of X parts, concerning both questions about Lilian’s thesis and questions about Jurgen’s thesis. On forehand we will explain which part we are discussing. - The main goal of our research is to better understand how the hospital-insurer relationship

develops when jointly purchasing expensive medicines. Hereby the focus of Lilian’s research is how different mechanisms influence this relationship and Jurgen’s research is focusing on the role of power within this relationship. The first questions are asked to acquire a better

understanding of you, your function and your organization. The aim of the second part is to gain understanding of which mechanisms are relevant considering the hospital-insurer relationship when jointly purchasing expensive medicine and how these mechanisms influence the

relationship. The final part is used to gain understanding of the role of power on the need for trust and contracts and how they influence the hospital-insurer relationship.

- The interview will take 60-90 minutes. Due to time limitations it may happen that you are interrupted and more specific questions are asked about particular subjects, since all subjects must be addressed.

- After the interview, there is room for questions and feedback that you may have. If you like to withdraw from this interview at any time, please let us know. You do not have to provide a reason for this.

Part 1

All that is discussed during this interview will be treated as confidential. If some of your quotes are used in the research, this will happen anonymously.

 Could you tell us something about yourselves and your function? a. Name interviewee

b. Position

c. Work experience in current position d. Name company

Part 2

1. Can you describe the relationship with the hospital/insurer? a. Difficulties

b. Treated fairly c. Same interests

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34 2. Are you collaboratively purchasing medicine with other hospitals? And is there involvement of

the insurer?

a. Can you describe the process of jointly purchasing expensive medicine? 3. Which actors are involved in this process?

a. Is top management involved?

b. Do you experience support of the top management? Yes/No - can you give an example? c. Who is in charge/leading?

d. Can you describe this person to me? Is he experienced?

4. Can you describe how you are communicating with the other actors involved in jointly purchasing expensive medicine?

a. Do all actors have the same interests?

b. Do all actors have an equally distributed amount of power?

5. In your opinion, are costs saved when jointly purchasing expensive medicine?

a. Assuming, when collaborative purchasing expensive medicine, costs are saved; how are these savings distributed?

6. Have you come across any difficulties or barriers regarding jointly purchasing expensive medicine?

a. Are there possible disadvantages of jointly purchasing expensive medicine? b. What impact did those difficulties have?

c. How could/did you overcome these difficulties?

d. To what extent do you depend on each other or are you able to influence each other?

Part 3

1. How would you describe your collaboration with the hospital/insurer? a. What kind of information do you share and on which level?

i. Volume, medicine prices, goals, plans

ii. How do you share information? regular meetings, email, phone, other iii. How often do you share information?

b. What kind of joint activities do you have with X?

c. Did you make any investments for the collaboration with x?

2. How do you control what is agreed upon in the contract with the hospital/insurer? a. Which control measure is the most relevant?

b. How strict are the measures?

c. How often do you control the actions of the hospital/insurer (and how)? 3. How detailed are the agreements in the contract with the hospital/insurer?

Relational and contractual governance in hospital-insurer relationships: the case of joint purchasing of expensive medicine