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Partnerships in Health Care: Creating a Strong Value Chain.

NOBODY IS HAPPY with our health care system. Health plan members (patients, employees), employers who purchase health care for employees, and payers (managed care organizations) bicker over costs, premiums, benefits, quality, access to services, and choice of providers. Managed care organizations (MCOs) continue to wage a bitter war against hospitals and physicians in an effort to control costs. In many markets, MCOs extract deeper and deeper discounts, first from hospitals and then from physicians. In response to pressure from MCOs, providers often band together to accept risk, manage populations of covered lives, and share revenues. In this setting, hospitals and physicians struggle to control health care delivery costs, provide quality care, maintain revenues, and ensure access for patients.

Amid low reimbursement rates, shifts toward outpatient services, and ever-increasing regulatory pressures, hospitals turn to their medical staffs to help control costs and develop physician networks attractive to MCOs. Struggling with deteriorating reimbursement rates, regulatory threats, and the perils associated with managing risk for patient populations, physicians search for methods to provide quality care to their patients while maintaining incomes. In this morass, there appear to be no winners. This high stakes "game" allows no party any measure of satisfaction and no solution seems forthcoming.

Recently, the health care industry has utilized accepted business principles for continuous quality improvement, reengineering efforts, corporate rightsizing, and information management. Partnering, another business concept, is a viable solution to many of our health care woes.

A partnership is a mutually beneficial collaboration between two parties trying to reach an agreed upon goal. [1] In this article, the term partnership is used to describe the relationship between two parties wherein both recognize that the success of one party is required for the success of the other. Although it may be a separate legal entity, a partnership is defined by the relationship and common objectives, not by legal status. A partnership begins when a strategic alliance is consummated, but certain elements are necessary to form a true partnership. In health care partnerships, benefit can accrue to all involved parties, including the employee/patient, employer, MCO, hospital, and physician.

A partnership arises from a mutual or perceived unfilled need between two parties, [2] often a supplier and a customer. Reasons to form partnerships include the desire to beat the competition or to fend off a competitive threat. The goal of the partnership may be to launch a new product, to improve customer service, or to enter a new market. The basis of the partnership may be to capitalize on an opportunity or to leverage funding. [4] In essence, the partnership should be established to create value by increasing creativity, improving skills, enhancing quality, interlocking core competencies, and/or reducing costs. Each of these is known to favorably affect the bottom line.

Steven Covey, in The 7 Habits of Highly Effective People, artistically described a partnership in his concepts of "win-win" and interdependency. [5] Successful people seek "win-win" relationships and interactions where both parties benefit. "Win-lose" and "lose-win" interactions, Covey says, impede successful relationships. Interdependency is the synergy found when two independent entities come together in a relationship wherein the total outcome is superior to the sum of the parts. [5] From a business perspective, interdependency occurs when two entities join forces, assure each other's well-being, and share risk, problems, and rewards. The union of the entities creates greater value than the sum of values that could be generated were the firms to maintain their independence. Interdependency results from true partnerships and the outcome is "win-win."

The five essential elements of a partnership

There are five essential elements in a successful partnership (please see Table 1). Trust is the most important--it facilitates dealing with unforeseen events, reduces unpredictability, economizes the cost of bargaining, and allows disputes to be monitored and ultimately settled. [4] Trust may be contractual, as with a written contract to which both parties adhere, or it may be on the basis of competence, wherein each partner acts on the premise that the other party will perform its role competently. Trust may also be based upon goodwill, which involves being responsive to your partner's requests and where both parties respond to opportunities to enhance value. [4]

Effective communication, another essential element, requires trust. In a partnership, communication must be dependable, consistent, free (meaning not for unilateral gain), and forthcoming. Communication allows each partner to understand the other's activities. Effectively monitoring the activities is also necessary, so ongoing, joint evaluations of the processes are needed to implement the partnership and to assess progress. This includes regular meetings to discuss objectives, as well as sharing information and reports. [2]

Partnerships must be built around long-term relationships. [3] It is simply not possible to successfully implement a short-term partnership. Time is needed to obtain trust, verify performance, document progress, and learn effective communication. Finally, shared values are necessary--beyond agreeing that financial profitability is a shared value--such as quality orientation, customer service, community service, family orientation, patriotism, spiritual achievement, or social conscience.

Lessons from Japan

The Japanese keiretsu, a unique type of business partnership, illustrates the partnership concept. To achieve a common goal, Japanese firms have formed tightly knit, integrated partnerships acting virtually as a single entity toward goal achievement. [6] In the keiretsu, suppliers have very few customers (often only one) and, in turn, the customer utilizes only a limited group of suppliers. By focusing on the needs of the other to achieve their own success, both the supplier and the customer find that some of their success resides in each other's hands.

A keiretsu requires close personal relationships to continuously nurture the partnership. Legal contracts may be necessary, but contracts alone are not sufficient to insure viability of the keiretsu. Each is based upon long-term interactions, mutual understanding of the other's business, and extensive trust, especially competence trust. [7]

Lessons from the U.S. business world

In the late 1980s, Chrysler Corporation saw the need to develop a supplier relationship. Chrysler was near collapse for the second time in two decades. Production costs were too high, design times were too slow to keep up with changing market desires, and quality remained problematic. Chrysler formed product design teams to decrease the time from concept to production, to lower product development costs, and to improve quality. Utilizing expertise from across traditional corporate departments, the teams consisted of experts in concept design, engineering, manufacturing, human relations, and finance. Chrysler added product suppliers to these teams, even though they were from another company.

Both Chrysler and the suppliers benefited. Chrysler was able to control supply costs and obtain parts in a more timely manner. Parts were of higher quality and more readily met specifications. The suppliers benefited from earlier knowledge of specifications, quantities needed, and cost limitations, using this information to make the required parts, all the time knowing they would have a guaranteed market.

All the elements of a true partnership are discernible in these Chrysler-supplier relationships. Chrysler trusts its suppliers by sharing trade secrets, allowing them to be part of the design teams, promising them an outlet for their products, and incorporating their input into the design process. Suppliers trust Chrysler, build parts specifically for them, keep within price agreements, and understand parts specifications so that they can manufacture parts precisely. This eliminates costly waste that suppliers often have in trying to deal with design specifications. By the late 1990s, Chrysler had achieved record sales and more than five years of strong profits. Market valuation was at an all-time high. These were crucial factors in Chrysler being acquired by Daimler-Benz.

Ben and Jerry's, the yuppie ice cream manufacturer, built partnerships based upon social values. To make a certain ice cream flavor, Ben and Jerry's partnered with Greyston, a small bakery that produced thin, chewy, fudge brownies. When Greyston had difficulty meeting the large volume orders, they accidentally altered the manner in which the brownies were processed. Instead of returning the brownies, Ben and Jerry's created a new ice cream flavor. To facilitate building the partnership, the two businesses sent employees to the other's plants so they could better understand each other's activities. [8]

Ben and Jerry's also forms partnerships with its customers. Ben and Jerry's sells ice cream that improves revenues and allows it to support social issues. Customers enjoy the great ice cream, but also benefit from supporting social causes, which are described on the containers and posted on the walls of local Ben and Jerry's ice cream parlors. [8] It's a "win-win" outcome.

Partnerships in health care

True partnerships in health care have been difficult to achieve. Some have been developed between large pharmaceutical corporations and small biotechnology companies. In this setting, research and development (R&D) is done by the biotech company who then partners with the pharmaceutical company to increase production and to obtain large-scale marketing and distribution. The pharmaceutical firm saves on R&D costs while gaining profits through product sales. The biotechnology company gets paid for its R&D efforts and gains access to the vast distribution channels required to properly market the product. Although some have been only temporary and others have ended in acquisitions, many survive to continue the synergy that exists from two entities using their core competencies as the basis for lasting partnerships.

Challenges in partnerships

Partnerships involve a number of difficulties. Differences in business practices and in organizational cultures are major barriers that must be overcome. There will be personality clashes and power dynamics between key personnel that need to be dealt with effectively. Differences and disagreements are inevitable and require time and earnest negotiation to achieve mutually acceptable resolutions. While trust is being established, commitments are challenged and differing viewpoints may lead to inappropriate expectations.

The dynamics involved in the transition to a partnership will test the commitment of each party. If commitments are variable and not shared equally, the chances for successful partnering are reduced. Intermittent surprises may occur followed by disappointment, confusion, and, ultimately, distrust. When this occurs, limited options remain, including starting over or accepting the fact that the partnership cannot be formed. Adverse selection occurs when a partner promises to deliver certain items to the partnership but then fails to do so. Moral hazard is manifest by failure to make all resources of one party available to the other. Both will doom a partnership.

The value chain

The concept of the value chain illustrates the benefits of partnering. McKinsey and associates constructed a value chain to demonstrate how various functions within a firm add value to products. [9] Examples of functions that add value include technology development, product design, manufacturing, marketing, distribution, and service. By performing these functions effectively, value is added to the product. Porter also developed a value chain, which was divided into primary and support activities. [10] Primary activities include purchasing, inventory, production, warehousing, distribution, sales, marketing, and service. Support activities include infrastructure, such as financial planning, information services, legal services, technology development, product design, and human resources management.

Health care delivery is enhanced when value is created for the patient. Currently, each entity--the employers, MCOs, hospitals, and physicians--independently develops a value chain that may or may not address value from the patient's perspective (please see Figure 1). Whereas the employer's value chain is normally focused on the product's consumer, the role of the employer in the health care value chain involves delivering value to the employee. The processes needed to effectively manage a health plan may define the MCO's value chain, but it must also deliver value to the patient.

The hospital's value chain involves integrating numerous departments and personnel to work constructively to add value to the services being delivered. When hospitals place the patient at the center of their activities, they bring the full measure of the value chain to benefit the patient. Similarly, physicians use numerous mechanisms to deliver value to their patients, including office facilities, office staff, nursing personnel, and, in some cases, other health care practitioners. The health care value chain is constructed of component value chains (employers, MCOs, hospitals, physicians) that interconnect and form a new one focused on the patient.

Partnerships and the value chain

Partnerships can be forged at various points along the health care value chain. To illustrate the role partnerships can play in adding value, a five-entity model, composed of the patient, employer, managed care organization, hospital, and physician, is examined (please see Figure 2). The health care value chain is a series of interconnected linkages (a chain) beginning with the employer and ending with the provider. Along the value chain may be a benefits manager, a health care insurance broker, an insurer (often an HMO), a health care network, acute care facilities, long-term care facilities, home health agencies, and even hospice care services.

Forming partnerships along the value chain adds greater value than would otherwise be achieved were the entities to maintain their independence. The employer should seek to partner with the MCO, the MCO with the hospital and physicians, and the hospital with the physicians. Building partnerships between the employer and the MCO enables the employer to purchase a quality health plan for employees at prices that allow the company to help control health care costs while ensuring that employees receive quality care and remain healthy. The MCO benefits by selling high quality, accessible health care to the employer while providing excellent service to the employees. The negotiated prices allow the MCO to cover costs and achieve profitability. In this manner, the MCO ensures stable enrollment from the employer groups, which allows marketing efforts to focus on obtaining new covered lives. Both the employer and the MCO win.

The MCO needs to sell the health plan to the employer at a price that will generate sufficient revenue to cover medical costs, as well as a profit. The premium paid by the employer must account for both. The value the MCO brings to providers needs to include hospital rates and physician fee schedules, which give providers sufficient revenues to cover their expenses and profits.

When quality hospitals and physicians join the health plan network, they add value by improving access and increasing choice. By agreeing to pay reasonable rates to network hospitals and reasonable fees to physicians, the MCO will obtain a stable provider network, something very important to plan members. Alternatively, if the MCO has a capitation arrangement with the hospital and network physicians, providers are able to obtain a percent of the premium dollar favorable to them that is affordable for the MCO. The successful partnership will manage costs effectively through the development of excellence in medical management, quality improvement, case management, and disease management while providing the best and most attractive member services.

By partnering with the MCO, providers maintain access to covered lives needed for both revenue and volume. The outcome is a "win-win" for all. The MCO profits and the hospital obtains sufficient revenue, either through appropriate rates or a reasonable percent of the premium dollars. The physician is able to maintain his or her patients, has access to new patients, and is properly compensated through a fee schedule or an adequate percent of the premium dollar.

The hospital-physician partnership is at the core of this value chain. They must work in concert to partner with the MCO so that they can offer the services that plan members desire and need. Physicians determine a substantial proportion of hospital costs by controlling admissions, lengths of stay, pharmacy costs, and ancillary service use. When physicians and hospitals share risk, they align their incentives to obtain covered lives, mutually benefit from a percentage of premium dollars, and work to provide quality care while controlling costs. Again, both parties "win" as proper medical management controls costs, which helps the hospital's bottom line. Physicians benefit by practicing at a quality hospital capable of providing needed services, while maintaining sufficient revenues.

By creating partnerships and strengthening the health care value chain, the patient obtains maximum benefit. The MCO focuses on the patient because the plan's ability to enroll and retain members depends upon high quality service and ease of access. When partnering with the MCO, providers manage patients efficiently and effectively. Outcomes are improved and costs are controlled. Patients benefit from the high quality and ease of access afforded by providers who have partnered with the MCO.

Strengthening the value chain

A partnership between the patient and his or her employer will require the health care benefits manager to choose a plan that maximizes quality care within the available resources. Employees should meet regularly with management to discuss their ease in accessing the health care system, choice of physician and hospital, and assessment about the care they receive.

Employers will be able to make informed choices about the MCO from whom they purchase health care based not only on cost and choice, but upon quality as measured by employee satisfaction or other outcome measurements. When employees partner with their employer in determining the plan benefits, the employer will more likely purchase health care from a quality-focused MCO offering competitive prices. The result is "win-win." The employee gets quality health care including a choice of providers and the employer purchases a plan that is affordable and keeps employees satisfied.


Successful partnership arrangements generate additional partnerships. Employee members form partnerships with their physicians to properly utilize and benefit from disease management, case management, and demand management programs. They stop worrying that needed services will be restricted by either the MCO or the provider. The well-being of the members is paramount for all parties along the value chain. Preventive services, medication compliance programs, and other wellness-focused services keep members healthy, premium costs affordable, profits solid for MCOs, and hospital costs under control. Physician incomes remain at acceptable levels while both the hospital and the physicians maintain a stable patient population. All parties benefit.

The end result of effective partnerships along the health care value chain is that everyone "wins," no one gets "hammered," and health care services are provided with quality, caring, and service. This approach is a viable method to achieve and maintain a competitive advantage for those who can successfully form partnerships. Partnerships offer a long-term survival strategy in the difficult realm of health care service delivery.

Curt M. Steinhart, MD, MBA, is Professor of Pediatrics, Surgery, and Anesthesiology at the Medical College of Georgia and President of Physicians Practice Group in Augusta, Georgia.

Rodney G. Alsup, DBA, CPA, is Professor of Accounting and Associate Dean of Michael J. Coles College of Business at Kennesaw State University in Georgia.


(1.) Penson, PG. Good Business Partnerships Take Effort. Business First - Louisville. 13:6, 1996.

(2.) Anderle, K, How strong is Your Partnership? Electronic Buyer's News, 1107:65, 1998.

(3.) Bender, J., Wiley, M. Partnerships the Keys to Success. Denver Business Journal. 49:3, 1997.

(4.) Schmitt, W.R. The Ethics of Partnerships. Executive Excellence. 10:15-16, 1993.

(5.) Covey, S. The 7 Habits of Highly Effective People. New York: Simon & Schuster, 1989.

(6.) Porter, P.L. The Power of Partnering. Software Magazine. 18:8, 1998.

(7.) Dyer, J.H., Ouchi, W.G. Japanese-Style Partnerships: Giving companies a competitive Edge. Sloan Management Review. 35:51-63, 1993.

(8.) Cohen, B., Greenfield, J. Double-Dip; Lead With Your Values and Make Money Too. New York: Simon & Schuster, 1997.

(9.) Grant, R.M. Contemporary Strategic Analysis. Cambridge, MA: Basil Blackwell, 1991.

(10.) Porter, M.E. Competitive Advantage. New York: Free Press, 1985.


* Successful Partnerships

* Creating a Value Chain

* Seeking Win-Win Relationships

* Improving Health Care Quality and Access

The health care climate is one of stormy relations between various entities. Employers, managed care organizations, hospitals, and physicians battle aver premiums, inpatient rates, fee schedules, and percent of premium dollars. Patients are angry at health plans aver problems with access, choice, and qualify of care. Employers dicker with managed care organizations over prices, benefits, and access. Hospitals struggle to maintain operations, as occupancy rates decline and the shift to ambulatory care continues. Physicians strive to assure their patients get quality care while they try to maintain stable incomes. Businesses, faced with similar challenges in the competitive marketplace, have formed partnerships for mutual benefit. Successful partnerships are based upon trust and the concept of "win-win." Communication, ongoing evaluation, long-term relations, and shared values are also essential. In Japan, the keiretsu contains the elements of a bonafide partnership. Examples in U.S. businesses abound. In healt h care, partnerships will improve quality and access. When health care purchasers and providers link together, these partnerships create a new value chain that has patients as the focal paint.

The Five Essential Elements for Successful Partnership

1 Trust




2 Effective Communication



Free (no unilateral gain)


3 Monitoring Program

Regular meetings

Progress evaluation

Process review

4 Long-term Relationship

Needed to establish trust

Early period challenges

Successes needed

5 Some Shared Values (beyond profit)

Quality orientation

Customer service

Community service


Family orientation

Spiritual achievement

Social conscience

The Health Care Climate: A Real Puzzle

There are few linkages between the various entities involved in purchasing and providing health care services. The patient is not the center of focus. This results in haphazard relationships, which leaves both gaps and overlaps in services. This health care system is disarrayed and lacks strength. Relationships between the entities are easily broken apart.

Recommended Reading

Partnering Topic of Breakfast for Champions Lecture, Nashville Business Journal. 12:19, 1996.

Haapaia, C.W. Establishing Lasting Partnerships. Manage. 44:6, 1993.

Barber, R.L. Rating Managed Care Plans as Business Partners. Healthcare Financial Management. 51:41-44, 1997.

Drucker, P.F. The End of Command and Control. Forbes website at, October 5, 1998.

The Health Care Value Chain

When employers, managed care organizations, hospitals, and physician form partnerships, the health care value chain is formed. When the focus is on the patient, the value chain is strengthened. The interlocking puzzle pieces form the "backbone" of the value chain. The chain links connected to the patient strengthen this value chain.
COPYRIGHT 2001 American College of Physician Executives
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Author:Alsup, Rodney G.
Publication:Physician Executive
Geographic Code:1USA
Date:May 1, 2001
Previous Article:What Skills Do Physician Leaders Need Now and in the Future?
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