Barriers for adopting the double agency role of hospitals

1

Barriers for adopting the double agency

role of hospitals

A joint purchasing initiative of the Dutch healthcare sector

By

Wout Wesselink

29th of June, 2018 S2048949

Master Thesis, Supply Chain Management

University of Groningen, Faculty of Economics and Business

Supervisor

Msc. A.C. Noort

Co-assessors:

Prof. dr. J. de Vries

&

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

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Abstract

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Content

2.2 Multi-tier Supply Chain ... 7

2.3 Supply Chain Collaboration ... 8

2.4 Agency Theory ... 8 2.5 Information sharing ... 9 2.6 Conceptual Model ... 12 3. Research Methodology ... 13 3.1 Research Context ... 13 3.2 Research Design ... 14 3.3 Case Selection ... 14 3.4 Data Collection ... 15

3.5 Data analysis and interpretation ... 16

4. Results ... 18

4.1 Joint Purchasing Pilot ... 18

4.2 Within case analysis ... 18

4.3 Cross-case comparison ... 24

5. Discussion ... 27

5.2 Key insights ... 28

5.3 Practical relevance... 30

5.4 Limitations and future research ... 31

6. Conclusion ... 32

7. References ... 33

Appendix I. Interview Protocol ... 38

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1. Introduction

The total expenditure on expensive medicine in the Dutch healthcare sector is 2.0 billion euro’s a year and steadily grows each year with approximately 100 million euro’s. The ever rising costs of expensive medicine is becoming a major problem as it puts pressure on the goals of delivering high quality and affordable care (Dobrzykowski et al. 2014; Vektis, 2017). Cooperation between insurers and healthcare providers is a promising approach to reduce the costs of purchasing medicine (Gobbi & Hsuan, 2015). Combining the total purchased products and services of multiple organizations could lead to a better deal with powerful suppliers (Hendrick, 1997, Vogler & Paterson, 2017). As insurers have contracts with multiple hospitals they could stimulate and facilitate joint purchasing initiatives. However the opposite is true, collaborations between insurers and hospitals are uncommon (Maarse et al. 2016). An important barrier for collaboration is the contradictory objectives between providers and insurers: hospitals focus more on quality of care while on the other hand insurers want to reduce the total costs. Instead of focusing on contradictory objectives, this research tries to understand how, insurers and providers can combine their strengths to resist the bargaining power of pharmaceutical companies and reduce the costs of medicine. To do so this paper focuses on information exchange in the insurer-hospital relationship in order to make joint purchasing possible.

Information sharing is an important enabler for aligning the goals in a relationship (Simatupang & Sridharan, 2005; Cao et al., 2010; Wong et al., 2012). Kembro & Näslund (2014) define this process as the exchange of important data, information and knowledge to others. Sharing information strengthens inter-organizational relationships and is key in order for these relationships to succeed (Li & Lin, 2006). Yet, the exchange of information in the insurer-hospital relationship is scarce due to a lack of transparency (Maarse et al. 2016). This results in relationships between insurers and hospitals that are based on pervasive information asymmetries, which makes collaborations more difficult (Bijlsma et al., 2008). For instance, hospitals often challenge the reliability of the information on costs and quality that the insurers possess (Zuiderent-Jerak et al., 2011). (Zuiderent-Jerak et al., 2011). From the perspective of the hospital, insurers only focus on costs instead of providing high quality of care. According to Zuiderent-Jerak et al. (2011) they have no interest an increased quality of care when this results in higher costs.

5 second-tier suppliers. Medicines are delivered to the hospitals by pharmaceutical companies. Hospitals in their turn provide treatment and medications to patients and have direct contact with the insurers about reimbursement policies. Being in the center of the supply chain, hospitals control the information and knowledge shared across the chain. Insurers depend on the hospitals’ knowledge regarding the price, appropriateness and effectiveness of medicine. According to Vogler (2013) hospitals could disclose this kind of information from the insurer to negotiate a better deal. This is in line with the findings of Taylor & Fearne (2006) as they mention that the exchange of information beyond dyadic partnerships is scarce. Information sharing along the chain is often difficult due to technological barriers, like the absence of integrated software, and organizational structures like contracts, procedures, and policies. Nonetheless, literature regarding which information should be shared with whom in a multiple-tier supply chain is still underdeveloped (Kembro & Näslund 2014; Kembro & Selviaridis 2015).

Behavior in supply chain relationships, can be explained by using agency theory (Fayezi et al., 2012; Wilhelm et al., 2016). Agency theory describes contracting problems that could arise when a company hires another firm to do a job. For example, opportunistic behavior could arise in contract negotiations if a firm has an information advantage over the other (Porterfield et al., 2010). This opportunistic behavior also arises in the contract negations between hospitals and insurers. As mentioned above hospitals have information about the effectiveness and price of the medicines from their negotiations with the pharmaceutical companies and may use it to their advantage in their relationship with the insurers. Vogler (2017) indicates that hospitals negotiate price discounts on medicines with the pharmaceutical companies, which are not mentioned to the insurers. This results in price differences in which the hospital pays less for the same medicine compared to the insurer. Wilhelm et al. (2016) investigated the adoption of the double agency role of first-tier suppliers in the supply chain. They concluded that the first-tier supplier is crucial for aligning goals of insurers with second-tier suppliers, which can be denoted as their primary agency role. The secondary agency role they can adopt is sharing information retrieved from the second-tier supplier towards the insurer. However, Wilhelm et al. (2016) conclude that the adoption of the roles of the first-tier supplier might be different when the second-tier supplier is more powerful than the first-tier suppliers, which is the case in the Dutch healthcare system. Due to the growing pressure on the Dutch healthcare budget hospitals want to cooperate with insurers to reduce prices of expensive medicine. But they also want to keep the margins they have on those medicine in place. Which is contradictory.

6 achieved. While these factors are crucial for hospitals to adopt the double agency role, more research on which barriers prevent the adoption of the roles is needed in order to make joint purchasing successful. Therefore, the following research question is introduced: As a result the following research question is introduced:

What are the barriers that prevent the hospital, as first-tier supplier, from adopting the double agency role in order to make joint purchasing possible?

The contribution of this paper is to gain a deeper understanding about the adoption of the double agency role of hospitals in the Dutch healthcare system and how it affects the joint purchasing initiatives. Providing barriers that prevent the adoption of the double agency role by hospital, enable organizations to take them into account when designing the joint purchasing of expensive medicines.

The remainder of this paper is structured as follows. The next section will give an overview of the factors influencing the relationship, how and what kind of information needs to be shared and which barriers insurers and hospitals need to overcome to be able to procure expensive medicine together. The methodology section will describe how the cases are selected and how the research is designed. Findings of the study will be analyzed and discussed in the result section and related to the theory in the discussion part. Lastly some concluding remarks and directions for future research will be given.

Pharmaceutical Company Hospital Insurer Second-Tier Supplier First-Tier Supplier Lead Firm/ Principal

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2. Theoretical Background

2.1 Expensive Medicine

The current expenditure of expensive medicines is steadily growing since 2014 with 100 mln. per year in the Netherlands (Vektis, 2017). This increase on medicine expenditure is not only limited to the Dutch healthcare system but the affordability of expensive medicine has become an issue in every European country (Vogler et al. 2017). One would expect that the prices of medicines are equal for all countries but they are not (Vogler et al. 2015). Most price differences occur due to the different reimbursement policies used (Vogler et al. 2017). With the elevation of money spent on expensive medicine the procurement is becoming a crucial part in an attempt to decrease the total healthcare expenditures of countries (Baghdadi‐Sabeti et al. 2009). In order for expensive medicines to remain affordable and thus available to all countries, stakeholders should focus on collaboration (Lopes et al. 2017).

2.2 Multi-tier Supply Chain

In line with the study of Wilhelm et al. (2016) this study adopts a three level supply chain perspective consisting of the key players of the healthcare system namely, insurers, healthcare providers and pharmaceutical companies. Since individual consumers have no direct influence on the purchasing of expensive medicine they will not be taken into account. Many definitions of supply chain management have been adopted, this study defines it as the structured strategic coordination of business functions and goal alignment within a company and between supply chain members in order to increase performance of the entire supply chain and its individual actors (Mentzer et al. 2001). The main objective of the healthcare supply chain is to replenish the right resources at the right place when needed (Gonul Kochan et al. 2018).

8 quality means the effectiveness of treatments and ensures the safety of patients. Secondly, accessibility incorporates both physical and financial issues that patients encounter before, during or after treatment to get the right care. Lastly affordability is needed to make sure everyone can make use of the healthcare system. The rising expenditure on expensive medicine is pressing on the affordability of healthcare and can be reduced by collaboration of the parties involved (Vektis, 2017).

2.3 Supply Chain Collaboration

The increasing pressure on the healthcare system is in need of a solution that can tackle the high costs while remaining high quality and affordable care (Dobrzykowski et al. 2014). In the rapidly changing environment supply chains need to put more effort into collaborations (Soosay & Hyland 2015). Supply chain collaboration is defined as accomplishing a higher competitive advantage when working together instead of acting as an individual (Simatupang and Sridharan, 2002). Firms can benefit from collaborations in several ways such as superior usage of resources, more efficient processes and gaining a better market position (Nootenboom, 2004).

In literature several characteristics of supply chain collaboration have been determined. Simatupang and Sridharan (2005) found five components that are important elements of supply chain collaborations namely, collaborative performance system, information sharing, decision synchronization, incentive alignment and integrated supply chain processes. Cao et al. (2010) also modelled seven key mechanisms, information sharing, goal congruence, decision synchronization, incentive alignment, resource sharing, collaborative communication and joint knowledge creating, reducing risk and costs elements of supply chain collaborations. Supply chain collaborations could contribute to the purchasing of expensive medicine as it can reduce the currently fragmented structure of the healthcare system (Vogler & Paterson 2017). A major barrier however are the globally operating pharmaceutical companies that negotiate deals with purchasers that represent countries, regions or even single firms (Vogler & Paterson 2017). In turn, the power of the pharmaceutical companies in these negotiations is often much higher and consequently the bargaining power of purchasers rather weak (Vogler & Paterson 2017).

2.4 Agency Theory

9 has been a popular topic within the supply chain literature (Hornibrook 2007; Fayezi et al. 2012; Wilhelm et al. 2016).

The objectives of a principal and the agent could be contradictory. Because the principal wants to minimize costs by monitoring and controlling the activities of the agent, while the agent wants to minimize the control and maximize the gained reward for the performed activities (Fleisher 1991). Acting from self-interest and opportunism the agent creates a difficult situation for the principal to verify how the agent is performing (Eisenhardt, 1989) Agents often show this behavior when they have a high information asymmetry advantage over the principal (Eisenhardt 1989; Ciliberti et al. 2011) and it enables contracting problems to arise due to the conflicting goals of insurers, healthcare providers and pharmaceuticals companies.

Within supply chains organizations could take both the principal role and an agent role (Fayezi et al. 2012). Extending these findings, the article of Wilhelm et al. (2016) stresses the importance of the double agency role of tier suppliers within a supply chain. Coupling of the primary role of the first-tier suppliers means they are complying with the demands of the lead firm and provide information regarding the execution of these demands to the lead firm. Coupling of the secondary role of the first-tier supplier indicates they are representing the demands of the lead firm across the supply chain and are provide sufficient information about the implementation of this. Decoupling, fully or partially, of these roles occurs when the first-tier supplier does not comply to these conditions. This double agency role could be adopted by the healthcare providers e.g. hospitals and could be the link to reduce procurement costs of expensive medicine. As they play a crucial role in aligning strategy for the entire supply chain, insurers and healthcare providers need to reduce the problems described by the agency theory by sharing information across the chain.

Barriers that are related to the agency theory are adverse selection, moral hazard, information asymmetry and incentive alignment (Eisenhardt 1989; Fayezi et al. 2012). Adverse selection is the result of a lack of information exchange beforehand. The principal is not able to assess all the characteristics of the agent misbalancing the relationship. In this study adverse selection is not applicable while the market structure compels insurers to work with all hospitals. Adverse selection is the result of a lack of information exchange beforehand. The principal is not able to assess all the characteristics of the agent misbalancing the relationship.

2.5 Information sharing

10 information between systems, people and departments need to be in place to align objectives and diminish the problems of principal-agent relationships (Lotfi et al. 2013). Organizations need to know which information they want to share with whom. How organizations are going to exchange the information and at what moment information will be shared amongst organizations (Holmberg 2000).

The quality of the information that is shared between companies is most important as it describes to what extent the information is useful for the other organization. Useful information can be defined by the receiving organization as high quality, accurate and easy accessible (Paulraj et al. 2008). Wei & Liang (2010) split the quality of shared information into three categories namely, accuracy, timeliness and frequency. The level of error in the transferred information measures the accuracy of the information. Next timeliness of information sharing points out the actual time between de the exchange of the information and when something happened. A last important factor is the amount of information exchanges and the time between information that is shared. More frequent updates of information will give more insight in what is actually happening and can reduce the level of information asymmetry.

Information sharing barriers Moral hazard

11 Incentive dis-alignment

The focus on information sharing ensures principals that their goals are corresponding with the goals of all agents (Fayezi et al. 2012). When the incentives between principal and agent are not aligned this could lead to opportunistic behavior. In the insurer-hospital relationship the focus is completely different while insurers want to deliver high quality healthcare with minimal costs while the hospitals want to deliver the best possible care regardless of the costs (Vektis, 2017). Thus the chances of opportunistic behavior are rather high in the relationship between insurer and hospital. Thus, creating a potential relationship with dishonest communication from the hospital to insurer.

Lack of trust

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2.6 Conceptual Model

Information sharing is important for the adoption of the double agency role of hospitals. However, several barriers exist which hinder effective information sharing in the healthcare supply chain, which are displayed in figure 2.1. Although, it is not yet known how these determined barriers influence how hospitals do or do not fulfill their dual agency role. Therefore, the aim of this study is to identify the various barriers that influence the adoption of the double agency role of hospitals. Also, this study tries to increase the understanding on the double agency role of hospitals in the presence of high supplier power of pharmaceuticals. As previous literature indicates this has not yet been examined (Wilhelm et al. 2016).

Barriers

Coupling/Decoupling Secondary Agency Role

Coupling/Decoupling Primary Agency Role

Joint Purchasing Moral Hazard

Incentive Dis-alignment Lack of Trust

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3. Research Methodology

3.1 Research Context

Since the reformation of the Dutch healthcare system in 2006 the supply chain relationships have changed. The reform of the Dutch healthcare into a more market-oriented system should stimulate efficiency and quality of care, while maintaining healthcare available for everyone (Van de Ven & Schut, 2008). The supply chain of Dutch healthcare sector can be depicted as a multi-tier supply chain where insurers fulfill the role of the buying firm. Healthcare providers, mainly hospitals, are agents hired by the insurers in order to fulfill the need for treatment of their insured patients. To cure all patients healthcare providers procure the medicine from powerful pharmaceuticals. Individual patients can choose freely which healthcare provider is most suitable for the job in order to reduce costs while maintaining the high quality standards (Ministry of Health Welfare and Sport 2016). This puts pressure on the insurers because they need to carefully monitor quality of care and close contracts with healthcare providers based on performance and costs (Ministry of Health Welfare and Sport 2016). The structure of the Dutch healthcare is visualized in figure 3.1.

Figure 3.1. Dutch healthcare structure (Ministry of Health Welfare and Sport, 2016)

14 reduced by collaboration of the parties involved (Vektis, 2017). The Dutch healthcare sector is suitable for researching collaborations to reduce the costs of expensive medicine while initiatives of joint purchasing between insurers and hospitals have started last year (Kleijne, 2018).

Since January 2018 a joint purchasing pilot to reduce the prices of expensive medicine in the Dutch healthcare sector has kicked-off. The pilot combines the forces of both hospitals and insurers to have a better bargaining position in the negotiations with the pharmaceutical industry. The joint purchasing pilot is an initiative of the umbrella organization of the Dutch insurers, Zorgverzekeraars Nederland. Together with other umbrella organizations representing all academic hospitals and one that represents all general hospitals, they started to structure the pilot and tried to get everyone on board. Resulting in 98% of the Dutch hospitals and all insurers agreeing to participate in this pilot. Combining their purchasing volumes could result in more bargaining power against the industry.

3.2 Research Design

The aim of this research is to identify the barriers in the adoption of the double agency role of hospitals. Examining this phenomenon is important to achieve successful joint purchasing of expensive medicine in the healthcare sector (Wilhelm et al. 2016). The focus of this study was on the healthcare sector due to its complexity and struggles between stakeholders, resulting in many barriers (Rego, Claro, and De Sousa 2014). An qualitative research, making use of a case study design, was chosen in order to identify the barriers for adopting the double agency role of hospitals. This research design has multiple advantages. Firstly, it provides the opportunity to observe the phenomenon in its natural environment. Secondly, it leaves room for unexpected barriers that could affect the adoption of the double agency role in in joint purchasing of expensive medicine. This is crucial since the barriers influencing the adoption of the double agency role of hospitals are not yet identified in previous literature (Wilhelm et al. 2016). Thereby, there is a lack of understanding regarding the double agency role in situations with a high supplier power. This study, besides identifying the barriers, also studies the adoption of the double agency role with the presence of a high bargaining power of pharmaceuticals.

3.3 Case Selection

15 (NZa, 2017). For example, the level of information asymmetry could be higher if hospitals have more knowledge regarding which is applicable to academic hospitals. Thereby, bigger insurers were preferred since these have more power than smaller insurers (NZa, 2017). It is assumed that larger insurers due to their bargaining power are able to put more pressure on hospitals to share information with them. Based on these conditions, one major insurance company operating in the Dutch healthcare insurance market and four hospitals, of which two academic and two non-academic, were selected. An overview of the case can be found in table 1.

Case Supply chain structure Academic vs. Nonacademic

A Insurer – Hospital – Industry Yes

B Insurer – Hospital - Industry No

Table 3.1 Case selection

With the case selection based on the academic vs. nonacademic characteristics, theoretical replication as described by the replication logic was studied. Theoretical replication which predicts opposite results, should occur when comparing the results from cases A and B.

3.4 Data Collection

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3.5 Data analysis and interpretation

Using qualitative content analysis via the usage of coding software, like AtlasTi 8.0, helped to analyze the transcriptions of the interviews. Coding was done in three stages, open coding, axial coding and selective coding (Strauss and Corbin’s 1998). In the first stage, open coding, numerous categories were directly retrieved from the transcriptions as an addition to the deductive coding categories that were retrieved from literature. These are displayed in table 3.2. In the axial coding stage, the number of categories were reduced by searching for similarities and differences. As categories were combined, each group was labelled according to factors retrieved from the literature background, which is called deductive coding. Furthermore, during the labelling process new factors emerged. Adding codes during the process provided a more in-depth understanding of the phenomenon. In this study, inductive coding was an important contributor for new factors, as knowledge regarding the barriers in the adoption of the double agency role of hospitals are still underdeveloped. Finally, in the selective coding a core dimension was chosen and others were related to the core dimension. This resulted in an overview that increases understanding about the connections between the most important factor and its related aspects.

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Description of coding categories

Coding Category Description

primary/secondary agency role

Incentives why the hospitals will enhance the primary or secondary agency role. For example, reduction of costs medicine, more buying power, efficiency increase.

Coupling of primary/secondary agency role

Instances in which the interviewee describes and indicates how the hospitals has acted to make joint purchasing and reducing the cost of expensive medicine possible

Decoupling of primary/ secondary agency role

Instances in which the interviewee describes and indicates how the hospitals do not act according the goal of joint purchasing and reducing the costs of expensive medicine

Information sharing Hospital - Industry

Situations and sentences in which the interviewee provides insight to what level information is shared between both parties

Information sharing Insurer - Hospital

Situations and sentences in which the interviewee provides insight to what level information is shared between both parties

Moral hazard Situations in which the hospital acts on its own behalf and does not pursue the goals of the insurer

Incentive dis-alignment Situations in which the hospital’s goals and insurers’ goals do not match

Lack of trust Situations in which there is a lack of trust between hospitals and insurers

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4. Results

4.1 Joint Purchasing Pilot

One major obstacle that the participants of the joint purchasing pilot encountered is that it is not possible to negotiate for every medicine because there need to be alternatives for a specific kind of treatment/disease. Important is that these have been proven to be almost equally reliable and working for the same disease. For the expensive medicine there are mainly two market types namely monopoly and oligopolistic. Most expensive medicine are patented and therefore positioned in a monopoly where the pharmaceutical company that owns the patent rights can determine the prices. So the focus of the pilot is on medicine that are positioned in the oligopolistic market. Here are expensive medicines for which are already alternatives available and it is possible to create concurrence between suppliers. These alternative medicine are most of the time cheaper variations of the original medicine and are called biosimilars.

In the pilot, an oligopolistic cluster of three medicines that are proven to be equal is selected. After the negotiations with all suppliers it is determined in which order they will be prescribed to patients. All hospitals agreed to put at least 75 percent of their incoming patients on the selected preferred medicine. If they do not get 75 percent of the patients they will get additional costs. Any percentage above 75 percent and hospitals will get a share of the total profit of the pilot. Nevertheless. the total discount that has been realized by the joint purchasing initiative this year is rather disappointing which leaves the parties involved quite divided over the success of the pilot.

4.2 Within case analysis

Quotes mentioned by the interviewees of both cases are illustrated in Appendix II. At least two quotes are presented that reflect each predetermined coding category for that specific case.

Case A: Nonacademic

Nonacademic hospitals are mainly focused on providing basic care to patients instead of complex care. Furthermore they do not have a direct connection with an university and focus therefore less on the development of new medicine or other kind of research. The general hospitals are the most common type of hospitals in the Dutch healthcare system.

19 powerful pharmaceutical companies together. Currently the relationship between the insurer and the hospital is therefore based on mutual dependency and the common goal of providing healthcare to the Dutch market. Although both nonacademic hospitals are participating in the joint purchasing pilot they are not making real changes to their previous prescribing behavior in order to reach the target of 75 percent. In the next section several barriers that influence the coupling or decoupling of the double agency are retrieved from case A.

Coupling/decoupling barriers of the double agency role of the hospital Autonomy of doctors

Nonacademic_B argues that providing the best care is not possible because the pilot requires the doctors to prescribe a medicine which in their eyes is not optimal. This results in prescribing behavior that is not in line with the pilot. Hospitals have to pay full prices on other alternative medicines that have not been selected by the pilot. Using these alternative medicines will therefore negatively influence the profit margin of hospitals. One of the main reasons for this behavior of doctors is a lack of transparency about the decision-making within the pilot. The medicine was selected by doctors from the umbrella organization which is not supported by all doctors. As mentioned by the hospitals it is time consuming to convince doctors to use the selected medicine instead of the medicine of their own choice.

Supplier power

For this pilot to work insurers want to gain more insight in how expensive medicine are purchased and what actual prices are. The problem they encounter is a powerful supplier that tries to manipulate the relationship between insurers and hospitals. Both nonacademic hospitals state that the contracts they sign with the pharmaceutical companies compel them to disclose information about the prices with other parties like insurers or other hospitals. They for instance use disclaimers, part of the contracts with hospitals, to keep the prices of medicine secret. Therefore hospitals are not able to share the prices of expensive medicines and their own profit margins. The only way hospitals may share information about prices with the insurers is by combining groups of medicine into clusters. Because of these clusters, information about the expensive medicine is not detailed and therefore not usable for insurers.

Incentive dis-alignment

20 healthcare while reducing overall healthcare costs. In their opinion the current relationships in the Dutch healthcare system are not as they should be. Insurers and hospitals should serve the same goal namely affordable and high quality of care. To achieve this goal hospitals and insurers need to cooperate against the powerful pharmaceutical industry. This reason, to provide high quality of care and reducing costs of expensive medicine, is why both of the hospitals participate in the joint purchasing pilot. However, eventually the doctors decide what kind of treatment and medicine is most suitable for a patient and not the insurers. In their decision-making they often do not take the price of medicine into account, because they want to provide the best care possible. Which is in line with the vision of the hospitals. Due to the disappointing discount that is negotiated in the pilot, hospitals have no incentive to actively pursue the goals of the pilot, namely to prescribe the selected medicine.

This results in hospitals having more incentives to collaborate with the pharmaceutical companies in order to keep their former margins. Both hospitals indicate they have better relationships with the pharmaceutical companies than with the insurers. Additionally pharmaceutical companies try to persuade hospitals to use their product by providing additional incentives like training of personal or free materials.

Another barrier indicated by Nonacademic_A is the lack of incentive to participate due to the effort they have to put into collecting the right data. Putting in this effort is almost more costly than the actual benefit of participating in the pilot. So they do share information about the pilot and the prescribe behavior, but it is done manually via e-mail and excel sheets.

Moral hazard

21 they made on the medicine from the insurers. They are afraid of not being able to innovate their treatments and technologies to ensure continuous high quality of care.

Scale of pilot

Another limitation indicated by both insurers and hospitals is the scale of the pilot. With the current structure of the pilot, with only one type of medicine, it would not make any difference. The scale of the pilot is just not large enough and should be expended with several medicines or even for the entire market. Also most hospitals have long term relationships with pharmaceuticals that supply multiple types of medicine to them. The pilot forces the hospitals to prescribe the selected medicine from only one pharmaceutical company. This could create a conflict with their established relationships. Nonacademic_B fear that it will result in higher prices for other medicines they purchase from their preferred pharmaceutical company.

Lack of trust

The last barrier that is retrieved is the lack of trust hospitals have in their relationship with the insurer. Insurers have tried to reduce the overall healthcare costs by pushing their demands to the hospitals, which has failed. Hospitals therefore are not sure if insurers are transparent about their motives in the joint purchasing initiative or about general aspects of the Dutch healthcare market.

Coupling/decoupling of the double agency role of the hospital

Combing the issues addressed above, it can be concluded that both hospitals do not adopt the primary agency role. The barriers in hospitals not fulfilling the primary agency role are the autonomy of doctors, incentive dis-alignment, moral hazard, and the lack of trust. Due to the combination of these barriers hospitals does not comply to the demands of the insurer and thus of the joint purchasing initiative.

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Case B: Academic hospitals

The academic hospitals focus more on complex care and are closely involved in many research projects because of the direct connection with an university. Due to the fact that they also suffer from the enormous growth of newly available expensive medicine, basic care is transferred from the academic hospitals to the general hospitals. Rearranging basic care is needed because the total costs of a hospital cannot grow beyond the agreement made with the ministry (Hoofdlijn akkoord) and to be able to maintain they complex care focus as stated by Academic_A.

Like both nonacademic the academic hospitals are also part of the joint purchasing pilot that started in 2018 and confirmed that expensive medicine expenses are pressing on the total healthcare budget of the academic hospitals and insurers. Keeping healthcare affordable and available for everyone is the main goal of the academic hospitals as they claim to be aware of difficult circumstances and see the need for change. In order to do so they see the joint purchasing pilot as an opportunity to establish better relationships with the insurers. This is in contrast with the current relationship between hospitals and insurers which is based on mutual dependency, information asymmetry and distrust.

Coupling/decoupling barriers of the double agency role of the hospital Power of supplier

The main cause mentioned by the both academic hospitals is the disclosure of information that they have from the pharmaceutical companies about prices. Again they are not able to share any information to the insurers. They are even surprised by insurers if they somehow possess information about the actual prices of expensive medicine. The only information that is shared with the insurers is data about the pilot and patients in general. The pharmaceutical industry on the other hand persuade hospitals to share information about their relationship with the insurer with additional discounts or funding. However, Academic_A tries to reduce the dependency of the hospital on the pharmaceutical industry by compensating doctors and departments for possible losses when they do not make deals with the pharmaceutical companies.

Incentive dis-alignment

23 discussing the structure of the Dutch healthcare to make sure it guarantees a high quality of care in the future. For example the academic hospitals already stimulate their doctors to use proven but cheaper biosimilars.

Scale of pilot

Because the current joint purchasing pilot entails only one cluster of medicine it is not a powerful message to the pharmaceutical companies. The scale of the pilot needs to grow to increase bargaining power in the expensive medicine negotiations with the pharmaceutical companies. Higher bargaining power would probably result in better discounts. Academic hospitals therefore question how the joint purchasing pilot is structured in the coming years to enable growth and be more successful in the procurement of expensive medicine.

Lack of trust

Some limitations about the implementation of the pilot are addressed by the hospitals. One that is already mentioned is the lack of trust between insurers and hospitals for joint purchasing initiatives to be successful. They see transparency as a key in this relationship to ensure organizations can and will not act on their own behalf or accuse other parties to do so. While there is not much information shared because of the supplier power, insurers and academic hospitals do not trust each other to act honestly and in line with the demands of the pilot. This needs to change in order to make joint purchasing possible as mentioned by Academic_A.

Coupling/decoupling of the double agency role of the hospital

Concluding from the barriers that have been determined, the academic hospitals adopt the primary agency role. Hospitals have aligned their individual incentives with those of the insurer. The only barrier that is affecting the primary agency role is the lack of trust of the hospitals in the insurers.

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4.3 Cross-case comparison

A structured overview of the cross case comparison is presented (Table 4.1). The two cases, academic and nonacademic, are compared based on the involved barriers and the adoption of the dual agency role of the hospital. The barriers will be discussed regarding the two different agency roles.

Barriers in adopting the primary agency role Incentive dis-alignment and moral hazard

One major issue causing differences in the adoption of their primary agency role are the incentives for the hospitals. As nonacademic hospitals are dependent on the margins they make on expensive medicine. With the disappointing discounts that are negotiated by the joint purchasing pilot the nonacademic hospitals at not willing to fully cooperate. On the other hand the incentives of the academic hospitals to cooperate are aligned with those of the pilot and those of the insurer. They do not depend on the margins made on expensive medicine and want to make sure to insurers that they do not need them. Therefore, the incentives of the academic hospitals are aligned and does moral hazard problem not occur. On the contrary, the incentives of nonacademic hospitals are not aligned and they will act out of self-interest in order to survive.

Also the incentives differ between academic and nonacademic hospitals regarding sharing information about new medicines to the doctors and patients and about the pilot to insurers. The nonacademic hospitals indicate it is taking too much effort to share information because it is poorly structured, resulting in a decoupled primary role of the nonacademic hospitals. While, the academic hospitals already started internally with stimulating their doctors to switch to cheaper alternatives and therefore took less effort to follow the guidelines of the pilot. Although the information that needs to be shared with the insurers concerning the pilot remains poorly structured it does not lead to a decoupled primary agency role.

Autonomy of doctors

25 Trust

Trust is indicated by nonacademic as well as academic hospitals as barrier in adopting the primary agency role. Since information sharing is not possible, mainly due to the supplier power, hospitals and insurers do not fully trust each other. They do not know if the other party is acting out of self-interest and might therefore accuse them of doing so. Especially, the hospitals have a lack of trust regarding their relationship with insurers, because the insurers have pressurized the hospitals to meet their demands in the preceding years.

Barriers in adopting the secondary agency role Supplier power

The main barriers for joint purchasing in the Dutch healthcare sector is the power of the pharmaceutical companies. They try to disrupt the relationship between hospitals and insurers by create a market in which it is hard to share information. One of the main reasons is the fact that all hospitals need to sign contracts with the pharmaceutical companies that compel them to disclose all information about prices or the negotiation process. While the pharmaceutical industry prohibits hospitals to share any information, they persuade hospitals to share information about their relationship with the insurer by providing additional discounts or funding. Thus, additional incentives arise, besides the margins on expensive medicine, that are not in line with those of the insurers. Resulting in the decoupling of one primary and both secondary agency roles. As concluded by insurer, in this way the pilot will fail even when the intentions are right which is in favor of the powerful pharmaceutical industry. Additionally, academic hospitals try to reduce their dependency on the pharmaceutical industry by compensating doctors and departments for possible losses when they do not make deals with the pharmaceutical companies. While it is in line with the goals of the joint purchasing group they cannot share much information towards the insurer that confirms their changes.

Scale of the pilot

26 Decoupling of the primary agency role of nonacademic hospitals

Decoupling of the secondary agency role of nonacademic hospitals is partially a result of the decoupling of the primary role. It is mainly caused by the incentive dis-alignment and moral hazard while the autonomy of doctors has no direct connection with the secondary agency role. Nonacademic hospitals do not want to damage the long-term relationships that they have established with pharmaceutical companies. The reason why they do not what to damage the relationship is that they are still depending on the discounts in order to survive. In contrast with the nonacademic hospitals, the academic hospitals do have incentive alignment with the insurers. Consequently, they do not experience decoupling of the primary agency role as a barrier.

Table 4.1: Provides an overview of the barriers that have been revealed by this study. Barriers affecting either the primary agency role or secondary agency role are presented for both cases A: nonacademic and B academic. For each agency role is mentioned if it is coupled or decoupled by the hospital.

Case A: Nonacademic

Case B: Academic

Barriers

primary agency role hospital - Autonomy of doctors - Incentive dis-alignment - Moral Hazard - Trust - Trust Coupled/ Decoupled

primary role hospital Decoupled Coupled

Barriers

Secondary agency role hospital

- Supplier power

- Incentive dis-alignment - Moral Hazard

- Scale of the pilot

- Supplier power - Scale of the pilot

Coupled/ Decoupled

Secondary role hospital

27

5. Discussion

The study tries to increase understanding about the double agency role of hospitals in joint purchasing initiatives with insurers. Based on the findings of this study, barriers are revealed which impede joint purchasing and make the adoption of the double agency role of hospitals difficult. From the barriers that have been determined by this study, practical implications are presented which could contribute to successful joint purchasing. The barriers from resulting from the analyses of both case are presented in the revised conceptual model (figure 5.1).

Barriers

Coupling/Decoupling Secondary Agency Role

Coupling/Decoupling Primary Agency Role

Joint Purchasing Incentive Dis-alignment Moral Hazard Scale of Pilot Lack of Trust Autonomy of doctors Supplier Power

Figure 5.1: Revised Conceptual Model In which barriers are presented and connected to the primary/secondary agency role they affect.

5.1 Revised conceptual model

28 provides new insights concerning this topic. Regarding the research context, this papers also contributes to the understanding of the double agency role of first-tier suppliers in a multi-tier supply chain in which the second-tier suppliers are more powerful.

5.2 Key insights

Dis-alignment of incentives and moral hazard are the most important barriers for hospitals to fulfill their primary agency role. The nonacademic hospitals have no incentive alignment with the insurers and therefore do not adopt the primary agency role, which is in contrast with the coupled primary agency role of the academic hospitals. The main cause for nonacademic hospitals to decouple is because they are dependent upon the margins they make on expensive medicine. This is in line with the findings of Fayezi et al. 2012 as the conclude that the opportunistic behavior originates from the minimal focus within the insurer – hospital relationship on sharing information. Without sharing information concerning the discounts or prices of the expensive medicine towards the insurer, incentives for the hospitals to decouple remain invisible. On the other hand, the relationship between pharmaceutical companies and hospitals is very transparent and therefore have more incentive alignment. It results in strong collaborations with the pharmaceutical companies instead of with the insurers. Which is the exact opposite of what the joint purchasing initiative aims for. Although the information shared across the supply chain is not very different from the nonacademic hospitals, academic hospitals are not depending on these margins and are therefore not relying on keeping the collaboration with the pharmaceutical companies intact. This enables the academic hospitals to decouple from the pharmaceutical companies and couple with their primary agency role.

29 causes more resistance to the adoption of selected medicine in nonacademic hospitals and thus influences their ability to couple with the primary agency role.

It is important for hospitals to adopt the primary agency role to be able to adopt the secondary agency role. If goals are aligned in the primary agency role first-tier suppliers are more willing to share information and transfer the demands of the lead firm towards the second-tier supplier. Leading to less opportunistic behavior in the entire supply chain. This is occurring in the academic hospitals while they do not pursue discounts and have less focus on collaborating with the pharmaceutical companies. In contrast, the nonacademic hospitals already decoupled the primary agency role resulting in less incentives to fulfill the demands of the insurer and to share information.

Although the incentives are of the academic hospitals are aligned with the pilot and the insurer, the secondary role is decoupled. The main barrier impeding the adoption of the double agency role of hospitals and thus the success of joint purchasing is supplier power. Previous literature on the double agency role indicated that, when the supplier power was less, the decoupling was mainly due to a lack of monitoring of the principal (Wilhelm et al. 2016). However this study indicates that, when the supplier has more power than the agent, decoupling is mainly due to non-closure agreements, and thus the disability to exchange information across the chain, and pressure from the supplier. Suggesting that the supplier determines which products are bought and what information is shared across the supply chain, which is contrary to previous literature. In previous literature is determined, when the buyer is more powerful, the buyer is mainly in control and is able to align its goals with the across supply chain. So, managing the incentives of the first-tier supplier is more important when the supplier has more power. This study shows that when the supplier has more power, they are able to offer more value than the buyer positioned on opposite end of the supply chain. The buyer is not able to create enough incentive and therefore an imbalance is created, in which the first-tier suppliers are more willing to align their goals with the supplier.

30

5.3 Practical relevance

The findings of this study result into recommendations for lead firms that want to have successful joint purchasing initiatives by coupling both agency roles of their first-tier supplier. Because of the power differences that are present in the healthcare sector it is crucial for all lead firms to invest in the relationship with the first-tier supplier. It is important to make sure that the goals between them and the first-tier supplier are aligned and monitored in a efficient and transparent way. Hospitals need to be stimulated and supported in their transition from being dependable on the margins they make on expensive medicine which is provided by the pharmaceutical industry, to a fully transparent relationship with the insurer. Incentives that are mentioned by case A are funding for innovation and benchmark the current reimbursements to actual costs so hospital do not only get the expensive medicine reimbursed but also additional costs like the delivery of medicine, training of personnel. This are conditions that could ensure both a coupled primary role and coupled secondary role of the hospitals. However, coupling the primary agency role is necessary in order to start coupling the secondary agency role.

Next is the current structure of the Dutch healthcare market that is an important aspect of why the double agency role is not adopted by hospitals. While come sort of competiveness is stimulated in the Dutch healthcare system the role of the government is still pretty high. They expect of the healthcare market to provide the best quality care for every patient, however this aim is contrary to the goal of reducing the overall costs of healthcare with joint purchasing initiatives. If patients have the right to receive personalized care, doctors want access to all medicine that are available. However with the competitive aspect of joint purchasing medicine this is not possible because one variant is selected. The government should therefore determine the guidelines for the Dutch healthcare in the upcoming years on this dossier. On one side the personalized care and thus accessibility of doctors to all available medicine or joint purchasing that will reduce expensive medicine expenses but limit availability of medicine to doctors and patients.

31 the medicine selection process and monitor the prescribing behavior more closely. This will increase the compliance of hospitals towards the selected medicine.

5.4 Limitations and future research

This study has revealed barriers that exist which prevent the coupling of the double agency role of first-tier suppliers, and are therefore not able to disseminate the goals of the lead firm across the supply chain. The first limitation of this study is the number of cases that have been used. Due to the complex structure of the healthcare industry, in the joint purchasing pilot and the expensive medicine topic, it was difficult to determine which people could provide the right data to answer the research question. Even if the right persons were contacted only a few wanted to contribute to the study by agreeing to be interviewed. In contrary to what was expected, academic hospitals were especially hard to contact and most of them would not collaborate. Nonacademic hospitals were much easier to contact and also more willing to answer the questions, but due to the lack of academic input it is difficult to provide a more extensive comparison between academic and nonacademic hospitals. Future research should focus on providing a more in-depth explanation, with a larger number of academic and nonacademic hospitals, of the barriers and how they impact the coupling or decoupling role of hospitals.

Because this study focused on the hospital – insurer relation the hospital – pharmaceutical company relationship is not taken into account. This study suggests that this relationship is however of great importance when aiming for the adoption of the double agency role of hospitals, because it affects the ability to jointly procure expensive medicine. Future research should investigate this relationship to increase the understanding regarding the behaviors in the entire healthcare supply chain.

Another limitation is the scale of the pilot and the starting point. Because this is the first national initiative of joint purchasing there is yet no data available that would indicate the actual result of the pilot. Therefore this study suggest future research should focus on bigger pilots with higher volumes to increase the bargaining power of the hospitals and insurers. This could increase the chances of the pilot to be successful.

32

6. Conclusion

33

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Appendix I. Interview Protocol

Interview protocol

The interview will start with the introduction the interviewers (Danny & Wout) and an explanation on how the interview is structured. If agreed by the interviewee via the consent form that will be signed, the interview is audio recorded by phone. Finally after the interview is transcribed the transcript which will be sent to the interviewee for possible revisions and for approval of the content.

This study aims to understand how the relationship between hospitals and insurers will evolve when pursuing joint purchasing of expensive medicines. By conducting a multiple case study, we aim to provide an explanation on how joint purchasing initiatives will influence the relationship.

First some general questions are asked about the structure of the market, relationships with purchasing partners and the role of the purchasing organization. In the second part of the interview the research tries to gain a more in depth understanding on how the relationship and joint purchasing can be influenced by the doctors that make use of the medicine. The last part will be on the role of information exchange in the relation between the hospital and the insurer. How it is exchanged, what kind of information is needed and how these factors can influence joint purchasing.

The duration of the interview will be 60-90 minutes in which all predetermined question will be asked. If at any point you want to withdraw from the interview this is possible without any explanation. We would like to finish the interview with some general feedback about how the interview went so we can make some alterations when needed for the interviews to come.

First Part

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

o Position

o Name company

o Work experience in current position

 Can you describe the insurer-hospital relationship? o Contact

39  What is your position in this relationship?

Pilot

 Are you familiar with the joint purchasing pilot that started in 2018?

 What is your opinion on collaborative purchasing initiatives between hospitals and insurers? o Benefits

o Disadvantages o Barriers o Aim

 What do you think of the current scale of the pilot?

Part 1 Thesis Danny

 How are medical specialist involved within the joint purchasing of expensive medicine?  Which medicine group

o Percentage of patients on the preferred medicine o Bottom up/top down?

 Is it possible for the medical specialist to deviate from the preferred medicine? o For which reason

o Explanation

o Are there consequences if there is no valid reason to deviate?

 How is your relationship/are the medical specialists involved with the pharmaceutical industry? o Consultation

o Training o Gifts

 Are the medical specialists cooperative to this project? o Why are/aren’t they?

o What aspects are hard to get cooperation from the medical specialists?

40  There was a recent news article about patients needing to change medicine due to cost

reductions or shortage of a medicine, these patients indicated that they feel sicker after this change.

o It is possible that this will happen within the current pilot?

o What will happen when next year another medicine will be the preferred medicine? o What is your/the medical specialists opinion about changing medicine?

Part 2 Thesis Wout

 Can you describe the relationship between hospitals and insurers?

 If it is a hospital, could you describe the relationship with the pharmaceutical company?  How is the purchase of expensive medicine organised?

o What type of organisations are involved in the purchase of expensive medicine? o How would you link your organisation to the other ones?

o Can you describe how the market for expensive medicine is organised?

 How would you describe the power balance between hospitals, insurers and pharmaceutical companies?

 Is there any information exchange between insurers and hospitals? o What kind of information is shared?

o How is the information shared between parties? o Is the information easily accessible for both parties? o Is the information accurate and up-to-date?

o Prizes o Use

o Alternatives

o On which level is information shared between both parties?

 Do both parties have the same amount of information? o What kind of information differences exist?

41 o What kind of information would you like to have from the insurer/hospital?

 To what extent does the insurer have insight in the negotiation process of the hospitals? o Is information of that negotiation process shared across the chain?

42

Appendix II. Illustration per coding category

Coding of cases illustrated with a few quotes per coding category

Case A: Nonacademic

Information sharing insurer-hospital Insurer: “Hospitals and insurers do not share much information about the margins that the hospitals make on expensive medicine because they are afraid that insurers would claim it instead of sharing it”

Insurer: “It is almost impossible to get information from the hospitals or industry about their relation and what kind of data they share”

Nonacademic_A: “Information that is shared with the insurer about the pilot is done manually in excel sheets, e-mail instead of an online portal. The effort that we have to put into collecting the right data is almost more costly than the actual benefit of participating in the pilot”

Nonacademic_A: “Discounts that we negotiate with the pharmaceutical companies may not be shared with the insurers or other companies. That is part of the negotiation”

Information sharing hospital-industry Nonacademic_A: “Pharmaceuticals will never share their profit margins on expensive medicine and how the price of those medicine is determined”