Healthcare supply chain operations: Why are doctors reluctant to consolidate?

Abstract

Abstract Despite the widely reported speculation in the 1990s that the era of small medical practices would end within a short period of time, the majority of physicians today still work as solo practitioners or in groups of five or fewer. Personal goals and values in addition to a lack of room for negotiation and difficulties in “being heard” in large organizations are just a few of the potential reasons why physicians resist consolidation and mergers. In this paper, we study the impact of different levels of cooperation on independent medical practices (healthcare providers) in the context of a healthcare supply chain to look into operational reasons why providers are reluctant to merge. In particular, we consider the competition for patients between two providers via insurance reimbursement rate and drug procurement contracts related to demand uncertainties. Assuming that the provider forms a conjecture about its competing provider’s response to its action, we analyze different levels of cooperation between these two providers—from no cooperation to full consolidation in terms of market shares. Our results show that (1) operational costs and demand uncertainties may prevent healthcare providers from pursuing a full consolidation strategy; (2) there exists a unique level of consistent and evolutionarily stable cooperation, and the parties may suffer losses if they consolidate beyond that level; and (3) even when the stable level of cooperation increases, the providers, the drug supplier, and the entire supply chain do not necessarily improve their profits.