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Applying the Five Forces. by Wesley Shu, text by D. Besanko et al. Hospital Market in Chicago Area. Thriving in 80s, then declined, recently on the rise. Internal Rivalry – Background. about 70 hospitals, mostly independent, i.e., low Herfindahl index (HHI) Fierce internal rivalry, because
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Applying the Five Forces by Wesley Shu, text by D. Besanko et al.
Hospital Market in Chicago Area • Thriving in 80s, then declined, recently on the rise
Internal Rivalry – Background • about 70 hospitals, mostly independent, i.e., low Herfindahl index (HHI) • Fierce internal rivalry, because • Many competitors • Production costs vary • Substantial excess capacity – occupancy rate < 70% at many hospitals • Stagnant or declining demand
Internal Rivalry – MCO Took Advantage • Managed care organizations (MCO, insurance companies) took advantage: • Contract with hospitals offering the most favorable rates • Lower the co-pay to encourage patients to choose those hospitals • Due to high price elasticity, demand increase – hospitals are more homogenous
Internal Rivalry – MCO Took Advantage • Negotiations between MCO and hospitals were secret, hospitals in disadvantageous position • Contracts are infrequent – hospitals assumed pressure
Internal Rivalry – Hospital Fought Back • Established brand identity, e.g., Northwestern Medical Center • Diversified into related products, e.g., skilled nursing services • Differentiated their services, e.g., establishing cancer center, etc. • Patients required hospital in neighborhood – increase loyalty • Merger
Entry - Barriers • Government regulation on new hospital construction • Hospitals are capital intensive • Brand identity not easy for new hospitals
Entry – The Other Side • Chicago area grew • Innovations allowed smaller niche hospitals
Substitutes and Complements • Few inpatient services could be performed outside the hospitals • But improvement in surgical techniques made it possible • Outpatient diagnostic facilities (ODF) – substitutes • But ODF can also be complement – hospitals already had technology and experience to do it – economies of scope
Suppliers • Demand for nurses high, supply low • Price rising for drugs and other medical supplies
Buyers • Insurers wield substantial power • Insurers are large size – high negotiation power, e.g., Blue Cross and Medicare • Highly skilled physicians became strong buyers who brought patients
Use of Pentagonal Analysis • Compared the intensity of competition of two industries (or the same one, different time) • Entry strategy and decision for entrant, ex. • Better enter in 80s in Chicago hospitals than now • Now, form an alliance with suppliers or buyers to bargain or compete with sub/comp and other hospitals • In 80s, differentiate to avoid sub/comp