A Twist on Oliver: Ten Lessons to Transform Healthcare Performance

INTRODUCTIONWithout a doubt, health care costs continue to rise. In the United States, health care costs are expected to reach $4.8 trillion by 2021 (Centers for Medicare & Medicaid Services, 2013). According to the World Bank, health care cost were approximately 17.9% of GDP in 2011 (World Development Indicators, 2013). Supply chain management in hospitals can account for as much as 30 percent of total hospital costs (Schwarting et al, 2011, p.2). Some experts, such as Bruce Johnson, CEO of GHX, states that supply chain is the second largest and fastest growing expense for healthcare providers; with only labor costing most providers (HIT Consultant, 2013). Approximately one third (31%) of annual operating expense can be attributed to the healthcare supply chain (Nachtmann, and Pohl, 2009).The technology of healthcare delivery is heavily dependent on supply chain decisions, operations and status. Adding to the concern of the healthcare supply chain are the tensions on reduced reimbursements for healthcare services, inflationary pressure of pharmaceuticals, high preference supply items, high volume supply items and the move to 'accountable care organizations.' According to Vance Moore, CEO of ROi (the supply chain entity within the Sisters of Mercy Health System based in St. Louis, Missouri), in a 2008 presentation in Chicago, the trend in the cost of the healthcare supply chain continues to grow such that, if the trend continues, supply chain could equal labor cost for annual operating expenses for hospitals and health systems between 2020 and 2025 (Moore 2008). Clearly, maximizing efficiency of the healthcare supply chain is an increasing concern. From an analysis of charges for fiscal year 2003, approximately 36% of inpatient nursing floor unit supply charge capture items were actually being charged correctly (Bacon and Pexton 2010).Other industries have mitigated their market risks and cost increases through the use of strategic partnerships and outsourcing (Vitasek, Ledyard and Manrodt, 2010). Firms like McDonald's, Proctor & Gamble and Microsoft have obtained cost saving, flexibility, transformation and innovation by developing key strategic partnerships (Vitasek, Manrodt, Kling, 2012). Relationships, partnerships and alliances for organizations can generate more opportunities than threats (van Aduard de Macedo-Soares and Moraes, 2013). These efforts must also hold firms responsible (Brusseau, Chiagouris and Fernandez Brusseau, 2013). The purpose of this article is to explore the possibility of reducing costs, increasing flexibility and transforming the work processes in healthcare through strategic relationships.One way to view these strategic relationships is through the lens of transaction cost economics. This lens has been used by several researchers in the health care field over the past two decades (Donato, 2010; Parker and Hartley, 2003; Coles and Hesterly, 1998; Ashton, 1998; Pelletier-Fleury, Fargeon, Lanoe and Fardeau, 1997).Specifically, we focus on a single article written by Williamson (2008) for several reasons. First, the article describes various types of relationships a firm can have with their suppliers, ranging from transactions to strategic partnerships. Second, his focus is on improving the performance of the supply chain. Finally, while our analysis provides insights on how these lessons relate to healthcare, many of them can also apply to other disciplines and industries as well.This articles is divided into three main parts. In the first part we begin with a brief overview of Transaction Cost Economics (TCE). Second, we start to apply his insights into ten specific lessons for health care professionals. This will be completed in the third part in the series. Finally, we will discuss future implications.What Exactly is Transaction Cost Economics?Transaction costs are the costs that occur when participating in a market. To use a very simple example, when buying a book, there is not only the purchase price of the book but also the costs you incur in purchasing the item. …