Co-Opetition - Adam M. Brandenburger [49]
Don’t Buy Health Care without Us In May 1995 American Express, IBM, ITT, Marriott, Merrill Lynch, Nabisco, Pfizer, and Sears, along with two other large companies that prefer to remain anonymous, formed a buying coalition to purchase the HMO component of their employee health-care benefits. The end result was a pooling of over 600,000 employees and dependents buying $1 billion of health insurance.19
American Express had already proved that the coalition concept had merit. In 1994, in conjunction with Merrill Lynch and Macy’s, American Express tested the idea in California, Florida, Texas, New York City, and Atlanta.20 The result was a 7 percent decrease in HMO premiums at coalition sites. In contrast, in places not covered by the coalition, premiums rose by 7 percent.21
An obvious benefit of being part of a buying coalition is sheer size. Health-care providers perceive that they can’t afford to lose the coalition’s business, so they all bid more aggressively.
But that’s not all. There is a second—perhaps even more important—source of power. American Express and its coalition partners have attracted over a hundred bidders into the game. As a result, no individual bidder has much added value, and that puts the coalition in an extremely powerful position.
The hundred-plus bidders is many, many more than any of the coalition members could have attracted individually. American Express might attract five, even ten, health-care providers—but not one hundred. The size of the American Express account wouldn’t justify the time and effort involved in making a bid—at least, not if there were a hundred bidders. The chances of winning would simply be too small. But with the coalition’s billion dollars of business at stake, even a small chance of winning is enough. That’s why a hundred bidders found it worthwhile to play.
Even if it could attract a hundred bidders by itself, American Express couldn’t do justice to all the bids. It would simply be too expensive. The coalition can share the cost of evaluating the hundred or so different offers. Indeed, there was an exhaustive review of the bidders who made it to the final round. A selection panel interviewed each plan’s representative about procedures for handling difficult medical cases. Each candidate had to supply twenty-five medical charts from cases with unfavorable outcomes—such as readmission for the same condition, and even unexpected death.22
The American Express buying coalition continues to expand. The ten charter members have been meeting with another ten prospective members to discuss other purchasing initiatives. This combined group—nearly six times as large and representing 3.5 million people—is discussing joint purchasing of mental-health, pharmacy, and other health-care benefits.23
Buying coalitions are more prevalent than one might think. Buying clubs such as Price/Costco and Sam’s are effectively buying coalitions, as strategy consultant and author Michael Treacy has pointed out.24 Instead of people going into the local supermarket and deciding which brand of toothpaste or peanut butter to buy, they leave the decision to Price/Costco’s professional buyers. These clubs don’t offer a large variety, but what they lack in variety, they make up for in price.
Forming buying coalitions is a powerful strategy to bring in more suppliers. We’re sure that more companies—independent bookstores, university libraries, and hospitals, to name just three—could profit from taking this approach to purchasing.
American antitrust law does put some constraints on buying coalitions. Coalition members can’t be forced to buy with the coalition—the ultimate purchase decisions must be voluntary. Of course, there’s usually financial and peer pressure to stay in the coalition. And the coalition must not have “market power,” which is generally defined as controlling more than 30 percent of the market.25
Bringing in Suppliers
1. Pay them to play.
2. Form a buying