Value Chains in Health Care

Abstract

The supply chain concept aided marketing by highlighting relationships that form a network of firms
creating products for consumers. It helped change the focus from individual transactions to a more
comprehensive view of the entire system. The value chain concept in marketing extends the supply
chain view in an important way: it explicates the value that is created at each stage of the chain. For
marketers, it is a vital tool in satisfying consumers – the final part of the value chain. This value chain
can be viewed as having two components: the value delivery system and the consumer.

This paper explores several approaches to value that are important in the functioning of the value
chain. It then delineates three main elements of the value chain and traces them as they apply to
services. It then focuses on one of the more complex services, the health care delivery system. It goes
on to describe the health care value network and examine the critical factors that affect the success of
the health care process. Finally, it delineates several important implications for health care marketers.

Introduction

The supply chain concept allows companies to see the network of interorganizational relationships
surrounding their activities, and how they fit into that network. It helped change the focus from
individual transactions to a more comprehensive view of their environment. The value chain concept in
marketing extends the supply chain view in an important way: it explicates the value that consumers
and organizations gain at each stage of the chain. For marketers, it is a vital tool in satisfying
consumers – the final part of the value chain. This paper defines the value chain as having two
components: the value delivery system and the consumer.

Delineating the value chain is conceptually simpler for a manufacturing process than a service (Evans
and Berman, 2001). Services vary in several important factors. The most important ones from the
value chain perspective are the level of customization the service provides, the degree of participation
of a partner or consumer and the uncertainty underlying the basic process. In manufacturing, many of
those factors are supported by formulas and metrics that allow a degree of precision. In services,
metrics are less precise and, consequently, the service value chain can be more complex. In fact, the
value chain is comprised of several possible value chains, thereby forming a network of relationships,
rather than the sequence customarily associated with the value chain. This really comprises a value
network.

This paper focuses on one of the more complex services, the health care delivery system. We describe
the health care value network and examine the critical factors that affect the success of the health care
process. Finally, we delineate several important implications for health care marketers.

Value, the Heart of the Value Chain

Marketing recognizes the vital process of satisfying customer wants. Marketing management
recommends the activities that will facilitate this process. The marketing literature devotes
considerable effort to describing the nature and scope of those wants and their relationship to customer
satisfaction and marketing success. At the outset, it must be emphasized that while some products can
enjoy healthy sales, they may only sell because there are no alternatives that can lay claim to satisfying
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a target group of customers. True success in marketing lays in providing a particular selection of
benefits that a group of customers values. Both marketers and consumers recognize that customer
value is the key to competitive success (Woodruff, 1997; Patterson and Spreng, 1997). However, the
marketing literature exhibits several different types of customer value without much focus on a
unifying value concept. The literature has reported a variety of value foci including, creating customer
value, customer perceived value, and value of the customer (in the sense of lifetime customer value).
The reason for this lack of central focus may lie in the variety of sources of literature on value. Value
has been approached from an eclectic perspective building on the fields of economics, strategy,
organizational behavior, psychology, social psychology, biology and others. Each field has contributed
to knowledge about value. However, economics and organizational behavior have special relevance.
For example, the economics influence can be seen in the work of marketers who state that consumers
will allocate their income to maximize the satisfaction they get from products and services. The
organizational behavior influence considers many applications related to value. An example describes
the value that can be created when a variety of actors cooperate and transact (Porter, 1985). Another
example reports the deployment of organizational resources to create value and core competencies
(Pralahad and Hamel, 1990).

Influences Shaping the Value Concept

Upon reflection, value is inherent in the groundbreaking work on exchange theory. Kotler (1972)
changed the nature and scope of marketing by broadening its definition to be an exchange process and
focused on the marketing transaction as an ‘exchange of values between two parties.’ Further work
explicated the exchange process but did not address how values are created. In an extensive review of
the value literature, Payne and Holt (2001) examined four key influences on that body of literature.
They include consumer values and consumer value; the augmented product concept; customer
satisfaction and service quality, and the value chain. Each of these influences led to the modern
conceptions of value that pertain to services and health care. It is instructive to consider them briefly.

Consumer values and consumer value. There are differences between the values consumers hold and
the value they derive from a marketing transaction. The values tend to be the criteria by which
consumers judge something like the worth of a product or service. Value tends to be a benefit provided
by a product or service and may be the net of cost versus benefit. A related idea is that of value-in-use.
Consuming the product conveys the value. Thus, drinking bottled water on a hot day conveys
refreshment. Since bottled water is not usually free, the value a consumer derives depends on the costs
of the product. Some significant work relates price, perceived quality and perceived value (Zeithaml,
1988). The lesson is that the consumer determines how much value he or she gets from a given
transaction.

The augmented product concept. Levitt (1980) was the first to write about the total product concept
and its relationship to consumer satisfaction. When a product does not deliver the benefits that
consumers expect, they are disappointed and suffer dissatisfaction. It is irrelevant whether their
expectations are reasonable or not. However, it is incumbent upon the provider to supply a bundle of
benefits to their products or services. Those benefits may take the form of packaging, finance,
advertising, customer service, installation, education and advice, delivery arrangements and other
valued elements. Levitt used a framework that described the varying views that a given product might
engender. They include the ‘generic,’ ‘expected,’ ‘augmented,’ and ‘potential’ product concepts. Each
concept differed in terms of the benefits it conveyed. This framework presents the product or service
as the source of consumer value. The augmented product, possesses more benefits than the generic

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product, and conveys value to more consumers. This conceptualization is useful in that it forces
marketers to see their products not in terms of their production inputs, but as how the consumer views
them as a set of benefits and want-satisfiers. It is also valuable in signaling the importance of active,
positive communication among all the parties. Bits of information like, “Runs on gasoline, kerosene or
diesel fuel” or “Was once used by Elvis Presley” may add great value to an otherwise satisfactory
product.

Customer satisfaction and service quality. This stream of research has focused on various aspects of
customer satisfaction and has attempted to link quality of an organization’s products or services with
satisfaction (Parasuraman et al., 1985; Woodruff and Gardial, 1996). Its important contribution has
lead to a realization of the importance of a company’s total product offerings to its customers. The
total product offering incorporates Levitt’s (1980) view of the augmented product and leads to deeper
understanding of how much value a given customer derives from a product.

The value chain. Based on the seminal work of Porter (1985), the value chain came to be understood
in the context of the internal activities of a company that create value for its customers. The value
chain took a holistic approach and included management of each of the company’s elements. That
view led to further refinement in the value delivery system (Bower and Garda, 1985; Evans and
Berman, 2001). This approach shifted emphasis from an internal company focus on functions and
activities to an external consumer oriented view of the value that company products and services
delivered. Thus, the value delivery system looks at the company from the consumer’s perspective. As
researchers refined the value delivery system concept, it became clear that the system, including its
suppliers, partners, manufacturers and customers was the important focus. This approach unveiled the
role of multiple stakeholders in helping to create value and set the stage for relationship marketing and
a more network view (Normann and Ramirez, 1994).

Value in the Value Chain

Each of these four influences has helped shape recent knowledge on value. Payne and Holt (2001)
note that the result has been three distinct value perspectives: “…creating and delivering superior
customer value, value of the customer, and customer-perceived value. They are closely associated with
value in creating competitive advantage.

There has been a great deal of research on creating and delivering superior customer value (Day, 1990,
Scott, 1998) that is associated with the ‘market orientation’ strategy literature (Slater and Narver, 1994,
1995). In fact, superior customer value can be seen as the bedrock of the value chain. The market
orientation literature links customer value with organizational performance, profitability and ultimate
success in the marketplace. Without delivering superior quality to customers, the argument goes,
companies sink into selling commodities, a competitive position which prevents companies from
competing on any basis except price.

Implementing a value focused market orientation requires building or enhancing a market-driven

culture, which continuously improves the customer value a company delivers (Slater and Narver,
1994). Further work reinforced that value of ‘value’ and stressed the importance of market perceived
quality versus competitors (Gale, 1994). Product or service quality is not sufficient for success; one
must deliver better customer value than competitors (Naumann, 1995).

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It is important to also understand customer value as ‘value of the customer’ to the organization. The
promotional literature emphasizes the lower costs of retaining existing customers compared to
acquiring new ones. In fact, not all customer segments are created equally from the company’s
perspective. Some existing customer segments will be profitable, others will be at the breakeven level
and still others will generate a negative profit and cost the provider money (Hallberg, 1995). Despite,
the lower cost of retaining existing customers, some of the existing customers will not be profitable.
Consequently, merely increasing customer retention efforts will not guarantee an increase in the
company’s profitability. Concentrating on the customer’s lifetime value is required. That will highlight
the long-term profitability of that subset of existing customers that needs to be retained, and the subset
of new customers that needs to be recruited. The combination of these segments and their management
will increase the firm’s financial performance (Zeithaml, et al., 2001). Together, customer lifetime
value and a measure of the level of profitability of a given market segment will be valuable in
managing which segments are served and how they are served to maximize a firm’s profitability.

The value of the customer literature is helpful in several ways. First, it is important to recognize the
differences in profitability in given customer segments. Those differences may be influenced by life
cycle or seasonality factors. Both are important in health care. Second, if the identified profitable
segments can be retained longer, profitability will be increased (Payne and Holt, 2001).

The last value perspective, customer perceived value should be the culmination of all the value
elements. Typically, marketing research attempts to measure this in customer satisfaction studies. It
harkens back to one of the definitions of marketing: “Satisfying the customer’s wants and needs.” The
emphasis is on the customer. It is vital for a provider to understand what the customer really values so
that he or she can design products and services that really supply those values. This orientation is not
new. It is the logical focus in deciding how to build products and services that will sell.

While implicit in the customer perceived value literature, the concept of cost needs to be emphasized.
Cost or sacrifice is part of most consumption decisions. Customers receive value in the form of want
satisfiers for value in the form of payment or sacrifice. That sacrifice can take the form of money, time
spent, distance traveled, or activities like product assembly or communications with insurers,
governmental agencies and third parties to complete the product or service.

Supply Chain versus Service Value Network

The value chain concept is relatively new in marketing. Marketing has recognized that satisfying
consumers requires more than just building relationships with them. In addition, there are other vital
relationships that involve key suppliers and resellers. The realization spawned the concept of the
supply chain, the stream of relationships among partners. A company’s supply chain partners include
upstream suppliers as well as downstream intermediaries. The upstream suppliers comprise a set of
firms that provide raw materials, components, financing, information and expertise to create a set of
goods and services. The downstream partners comprise the marketing channel, the traditional
distribution focus of marketers and the connection to the ultimate consumer.

Since alternative supply chains may exist to serve the same market segment, supply chains, not just
firms, compete for that segment. A firm’s actions and those of its supply chain partners determine its
success. However, the supply chain view may be too limited in scope. It connotes the manufacturing
model in which inputs flow in one end and outputs in the form of products flow out the other. The
implication is that raw materials, manufacturing capacity and technology are the first step in marketing

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planning. In essence, it conveys the production orientation of business. In practice the supply chain
tends to emphasize increasing quality and decreasing price. Wal-Mart typifies that approach.
Although Wal-Mart is a wholesaler-retailer, it exerts continuing pressure on its supply chain. Here
relationships mean little; the emphasis is on price and delivery time. Supplier firms know that failure
to continuously reduce price over the long haul means the loss of Wal-Mart’s orders. Wal-Mart will
simply look elsewhere. This view is a logical outcome of the manufacturing model inherent in the
supply chain. It is based on the fundamental assumption that consumers will value lower price above
all else. Only as long as that assumption is warranted, will the supply chain view be productive.

Marketing dictates that a more beneficial approach is to start with the ultimate consumer’s wants and
needs. With that starting point one can focus on building products and services that satisfy those needs
and can gauge the value they provide the target customer. Thus one can track the value that each stage
of a chain of firms – a value chain – provides customers. The value chain is therefore a group of
entities: suppliers, distributors, and even consumers themselves, who partner with each other to
improve consumer satisfaction. It is consumer satisfaction that is the measure of the delivery value
chain’s performance and the standard against which other value chains are evaluated. Companies like
IBM and General Motors have literally hundreds of partner firms that form a community or network of
suppliers and outsourcing partners that work to increase the overall performance of their respective
value chains. In addition, a given corporation, such as General Motors, may have different value
chains for each of its strategic business units.

Incorporating the customer’s perspective offers the prospect of satisfying consumer wants better than
that provided by the supply chain approach. While the term value chain is used here, a more accurate
description is the value network. The chain connotes a sequential process like that in manufacturing.
Typically, step one comes before step two which comes before later steps. The network describes
firms whose relationship is non-sequential. For example, financial partners may provide resources at
various stages of a process and will interact to adjust the nature and amount of financial resources
needed at a given stage.

The Value Chain in Services

The value chain, one of the more important concepts in the business literature today, has its clearest
application in the manufacturing sector. This is so in part because it is a straightforward extension of
the supply chain. The primary driver of the value chain is the product as it moves through the chain,
from producer to consumer. The product moves from conception, transformation from raw materials,
through design, manufacturing and distribution via different channels (and players) to the intended end
users. However, the importance of the value chain approach is that it shows not only the progression
of added value as a product or service transitions the chain, but also the impact of the consumer in
delivering that value. Figure 1 is a simplified view of the value chain as a network. The value chain
comprises two components: the value delivery network, which is based on the supply chain, and the
consumer.

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 The VALUE CHAIN THE VALUE DELIVERY
NETWORK

Suppliers, retailers, external organizations like

banks, government agencies, marketing
researchers, non-profit interest groups and other
stakeholders
Lifetime customer value
Customer
perceived value –
Delivery of superior influenced by
quality products and communication
services

CUSTOMERS
INDIVIDUALS

Figure 1 – Value Perspective in the Value Chain

The main objectives of the value delivery network are to deliver superior quality products and services
of perceived value to the customer. In addition, the value chain attempts to evaluate the lifetime value
of each of its customers. It is important to visualize the network’s main outputs before continuing with
the specific details.

The value chain includes numerous organizations, which seek to maximize their self-interest. In the
past, such organizations took a win-lose transaction view of their activities. Often the transaction was
the division of a fixed reward, someone got one share, the other the remainder. In such circumstances,
the result was adversarial negotiation without a long-term focus. The channel management literature
depicts the dyadic, adversarial relationship in traditional marketing channels.

The relationship management literature highlights the importance of relationships between

organizations and consumers but also among the organizations, which are part of the value chain
(Gummeson, 2002). To be successful, organizations must build effective interorganizational
relationships. Those interorganizational relationships tend to persist and can lead to value chains able
to compete with others to satisfy consumers. The consumer is often unaware of the network of
relationships behind his immediate retail contact. In short, consumers build relationships with
organizations and think only of the organization as the means to satisfy particular needs.
Consequently, consumers expect the retail organizations to provide services successfully without
concern about any problems beyond the retailer’s control. If there is a problem, consumers tend to
blame their contact organizations for those problems that interfere with service success. The lesson is
that all of the organizations in the value chain can be important for service success and any one can
harm the image of the entire chain.

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Consumers of services present a special perspective. In many cases their participation is part of the
service. The examples of haircutting, health care or fitting of clothing require the consumer’s
participation and cooperation. The image of a child’s first haircut speaks volumes of the quality that
can result from an unwilling partner. Even if the consumer is a willing participant, their knowledge is
usually limited compared to the service provider. From auto repair to health care, the consumer is
called upon to describe the symptoms. Often they miss important details that can send the diagnosis in
the wrong direction. The consumer is usually the weak link in the service chain and if their
expectations are unrealistic, the result will be dissatisfaction.

Thus the value chain can provide superior quality products and services, but if the consumer does not
recognize their benefits, their perceptions will not be accurate. As a result, their level of satisfaction
may be lower than warranted. It is important for service providers at several levels to communicate
with prospective and current customers to insure that their expectations about service benefits are
accurate.

Example of the Service Value Chain

Recently, the Home Depot Company, the large home products corporation suffered a serious problem
with its value chain that caused widespread customer dissatisfaction, cost the company hundreds of
thousands of dollars in customer service remedies and spawned an internal reorganization of its value
chain. In this case the value chain includes a manufacturer, an installation company, and a government
agency.

Hurricane Isabel hit the U.S. directly in the Middle Atlantic States. After years of storm free hurricane
seasons, the region’s trees grew significantly, posing a threat to the power grid. When Isabel hit,
numerous tall trees succumbed to the wind and rain and damaged the power distribution network.
Thankfully the storm took few lives but it caused several billion dollars worth of property damage.
Despite the emergency dispatch of electric line crews from twenty or more states, some areas around
Washington, DC were without power for several weeks. The loss of power caused homeowners and
small businesses to rush to the Home Depot to purchase one of several stationary generators. These
units are not the portable, relatively inexpensive units that run on gasoline. They are heavy, expensive,
automatic units that run on liquid petroleum (bottled gas) or the natural gas piped into homes.
Installation is complicated, delicate, expensive and time consuming. To the consumer, all of the costs
might be worth it since the generators turn on automatically in a power interruption and turn off
automatically when the power is restored. They promise a robust measure of safety against the costs of
power interruptions. In their cost/benefit analysis, many small companies decided that their $3000
purchase price and basic installation of at least $1500 was worthwhile.

Two problems arose almost immediately. One was lack of production for the unprecedented demand.
The manufacturer, Generac, responded to the pressure by scheduling three production shifts and
working six days a week to catch up. Their efforts bore fruit but there was some delay in balancing
orders with shipments. The second more serious problem was the lack of installation capacity. The
Home Depot negotiated an installation contract in order to gain a low installation price for the
consumer. Consumers paid a $50 survey fee to determine the final cost of installation. The official
installer for the Mid-Atlantic region lacked sufficient labor and facilities to deal with the
unprecedented demand. Numerous customers waited in vain for a visit from the survey estimator. As
a result, the Home Depot was flooded with consumer complaints. Many took the form of, “You’ve had

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my money for six months and I still have no visit.” As customer complaints mounted, individual
Home Depot employees started advising customers to buy generators, have them shipped to their
homes and solicit third party installation bids. While potentially helpful, such efforts harmed the
Home Depot image of one-stop shopping.

The corporation was forced to deal with its value chain. After helping to jumpstart generator
production, it attempted to boost installation success. Home Depot management decided to deploy
several authorized installers. Some customers did get $50 survey visits and installation estimates.
Most were told that a new installer would handle installation. Many asked if the actual installation cost
would match the estimate. In good faith, Home Depot employees promised that it would.

Without control over the value chain installer organizations, Home Depot was at the mercy of other
organizations’ expertise and resources. Too often, the new installer charged a much higher installation
fee, causing irate consumer response. In one of several cases, the old installer’s written installation
estimate violated building codes and required expensive modifications which added more than $1000
to the installation charge the consumer had already paid. Home Depot was left bearing responsibility
and assumed the cost. The unit was installed but the story did not end there. The new installer failed
to apply for the correct building permit. Fully eight months after the customer paid approximately
$4800, and Home Depot bore an additional $1000 expense, the generator is still not usable. Without
the proper building permit, no inspections can be done and the installation cannot be approved. Home
Depot customer service has been active, but to date, ineffective. While this example case is being
resolved, Home Depot chose a structural remedy.

The corporation responded by creating a Home Depot installation department that is responsible for
procurement, delivery, and installation; permit application, final installation and maintenance. By
coordinating all of the activities using corporate resources, Home Depot hopes to control its value
chain to deliver superior customer value as well as to reinforce the customer perception of its value
delivery. While the cost will be considerable, the investment may reap handsome dividends. The
purchase information will help the company estimate each customer’s lifetime value. Arguably,
customers who opt for expensive installed products like generators may be future customers for home
or business renovations. If, and this is critical, if Home Depot’s installation value delivery is superior,
it might gain considerable sales of both products and installation services.

The Health Care Value Chain

According to Burns (2002) the value chain in health care includes five steps, consisting of groupings of
organizations performing similar tasks:

1. Payers (government, employers, individuals, and employer coalitions)

2. Fiscal Intermediaries (insurers, health-maintenance-organizations, and pharmacy benefit
managers)
3. Providers (hospitals, systems of hospitals, physicians, independent delivery networks, alternate
site facilities (physician offices, medical and ambulatory surgical centers and pharmacies)
4. Purchasers (includes a variety of resellers such as pharmaceutical wholesalers, medical surgical
distributors, product representatives, independent contracted distributors, an assortment of mail
order and Internet distributors, and group purchasing organizations)

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 5. Producers (pharmaceutical manufacturers, medical device manufacturers, medical surgical
manufacturers, providers of information technology services and manufacturer of capital
equipment.

Burns conducted a comprehensive three year study designed to identify and profile the major
participants in the health care value chain and how they operate together and alone. The study was
facilitated by industry participants and represents a sea change in the health care industry. Major
structural changes include vertical integration. Examples include hospitals and hospital systems
teaming with health insurance organizations as well as ambulatory care businesses acquiring physician
practices. Horizontal integration has also occurred with hospitals buying other hospitals. Other
horizontal integration includes group-purchasing organizations merging to form larger groups, and
pharmaceutical manufacturers acquiring others. There are pressures from managed care organizations,
changes in the Federal government’s reimbursement programs and in 1996, the passage of the Health
Insurance Portability and Accountability Act (HIPAA).

All these changes increased the importance of needed improvements in the health care delivery system.
If the health care value chain was viewed as relatively unimportant prior to the 1990’s, numerous
influences changed that view. The rise in e-commerce facilitated improvements in the supply chain
aspects of the value chain, further increasing the attention focused on the value chain. Optimizing the
processes across participants, managing the whole chain partnering and developing closer relationships
through information technology are all deemed as important goals en route to a more efficient and
effective value chain.

The health care delivery system, like most services has several characteristics, which further
complicate a simple adaptation of the linear and sequential value chain view as a concept for services.
The value chain is described as linear and sequential process (Porter 1985) starting with raw materials
and ending with the end-user. As such, it describes many manufacturing to end-user (business-to-
consumer) and business-to-business operations. That view applies to the value chain within the single
corporation and to the value delivery chains across several organizations.

The health care value delivery system can be described as those elements that must precede service
delivery and the delivery of the health care services themselves. The elements that must be in place
include hospital buildings, trained and certified medical staff as well as all the support services. That is
true across all of the business and managerial functions as well as the health care specific functions of
any health care participating organization. The development of capabilities for service represents a
huge up-front investment and is an important factor to be considered when the cost of providing
services is considered. Although in actual practice these processes are neither strictly linear nor
sequential it is convenient to represent them as such. Figure 2 is an adaptation of Porter’s 1985 model
of the value chain to health care. It separates the steps required for developing capability, which must
take place prior to any health care delivery.

.
Place Figure 2 about here

The above view of value chain incorporates the marketing perspective of the customer required for the
value delivery chain (Evans and Berman 2001). That view is further explicated next with regard to,
and as applied to, health care value and delivery chains.

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 Patient Participation And Input In The Health Care Value Delivery Chain

First, the participation of the patient in the provision of health care services, greatly affects the
objective outcome of the value chain (better health). They help by providing a description of the
symptoms (input) and in following the prescribed treatment regimen (process). As part of the value
chain their participation helps determine the perceived value they receive, the patient’s view of their
treatment. In effect, the patient participates in the value chain several times over the course of the
treatment, and thus has considerable affect on the overall outcome of the health care value chain.
Beginning with providing correct information and description of symptoms, followed by judicious
follow-up with medications and the treatment plans are an integral part of the health care value chain.
Where needed, subsequent visits to other health care providers (pharmacies, test laboratories,
diagnostic x-rays, etc.) followed by repeat visits to the original health care provider impact the
outcome.

Second, there are also objective variations in the cost of providing the correct treatment. The patient,
who provides misleading symptoms in terms of input to the process, may in fact require many more
diagnostic tests, numerous visits and possibly several treatment plans until the correct one is identified.
Likewise, delaying treatment by ignoring warning signs and avoiding timely treatment can lead to a
different value chain. An ignored pain in the leg may prove to be a blood clot. If ignored, it may travel
to the chest area, which in turn may require hospitalization, or expensive surgeries. Again, the
participation of the patient impacts the value chain.

Third, the overall physical and mental health and fitness of the patient are important. Even if the right
symptoms are described correctly, and in a timely manner, the patient’s overall health and other
preexisting medical conditions may necessitate more expensive procedures to achieve the desired
results. Thus pregnant patients whose condition is considered to be of relatively “high risk” can require
substantially more care than others. Different women, delivering healthy babies could generate
substantially different cost figures, impacting the outcome of the value and delivery chain.

Fourth, not all treatments are risk free. The treatment for certain illnesses may have side effects which
are rather negative in their impact on the patient’s quality of life, and overall satisfaction. Thus an
objective medical treatment, such as amputation of a limb, can impact the patient’s final quality of life.
Likewise, the old, lonely patient who suffers from arthritis may want someone to listen to his or her
problems more than for a doctor to dispense pain relief medication. A busy health care provider may
not have the time to listen, focusing instead on the medical aspect of the patient’s needs, disregarding
the emotional needs.

The Impact of the Number of Participants in the Value Delivery Chain

The number of participants taking part in the health care delivery system depends on the prescribed
treatment process and greatly affects the outcome of the value chain, or value delivery chains. Whether
the required process starts and ends with the same health care provider or moves on to incorporate and
involve additional participants define – in and of itself – several value chains.

First, each health care provider has an administrative and bureaucratic interface that the patient meets
prior to meeting with the health care provider. The augmented service includes the first contact point
with every provider – the person making the appointment a receptionist or a ‘voice on the phone’. In

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most doctors’ offices and practically every hospital, pharmacy and laboratory – collecting information
about the patient and the availability of a health insurance plan precede the provision of services. The
service includes the waiting room, the length of the wait, the comfort level while waiting, the
existence of a television set for distraction and even the relevance of the available reading materials.
These are all part of the value chain. Often times there are added waiting periods in the examination
rooms, another part of the health care delivery chain. The health care provider’s office must also
perform many functions following the doctor’s visit. Billing, scheduling follow-up appointments, and
answering insurance related questions and processing co-pay amounts all help determine the perceived
outcome of the value chain, the service’s perceived value. The above aspects become even more
involved in a hospital environment where many more administrative and bureaucratic systems are
involved – often built around hospital departments or functions, rather than around the patient.

Second, there are often ancillary medical and health care services surrounding the visit to the
physician. A visit to a doctor’s office may well begin with a nurse, or a physician’s assistant, who sees
the patient before the physician enters the examination room. Taking and recording the patient’s
medical history, measuring the blood pressure, heart rate, weight and height information – all that is
part of the value and health-care delivery chain. The need to perform tests, whether in the provider’s or
a hospital can add a laboratory, and possibly a second visit to the prescribing physician. Add the
prescribed medication, and now a pharmacy and a pharmacist dispensing the medication are added to
the value chain. In more complicated cases an ambulatory surgical procedure is required and the value
chain changes once again. Moving into a hospital for treatment, or to an assisted living environment
redefine the value chain. In fact, the nature of the value chain changes based on both the health care
and medical needs of the patient, and the availability, physical proximity, delivery speed and efficacy
of the participants taking care of these needs.

If an automobile accident triggers the health care need there may be emergency medical services
involved, at times combining both police and fire fighters, and when needed, an ambulance or a
helicopter and paramedics. The value delivery chain can expand, and involves many participating
individuals and organizations in delivering first aid. If an admission to a hospital is required that
process becomes far more involved adding admissions related medical care and a battery of tests. The
attending physicians and nursing staffs may now represent a variety of specialties, departments and
health care modalities. When the accident is a work related injury, there are added physicians
representing yet more organizations. They get involved representing workers’ compensation
authorities and other health insurers to name a few.

Third, the third-party that reimburses the costs of the treatment is a major participant in many health
care transactions between patient and provider. Obtaining that reimbursement requires effort and
information and affect the value chain’s outcome, whether the third party is a private insurer or a
government agency. The third party insurer collects premiums from the patient or their employer,
negotiates payment schedules with providers, prescribes and dictates medical procedures and uses the
power of the purse. In so doing it affects the value chain in health care. In the case of many HMO
organizations, specific medical procedures must be subject to administrative and financial reviews in
addition to the medical prescription. Patients may perceive that the required administrative reviews
have a negative affect on the value chain.

Fourth, the process of information transfer within the chain, both in terms of accuracy and efficiency
determines the overall value derived from the value chain. Medical information availability, its timely
processing among health care providers and the accuracy of the transmission impacts the value chain

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and is critical for the system to function. However, the value chain is also affected by the private and
sensitive nature of the information exchanged so that its distribution must be most carefully guarded
and controlled. Unlike most value chains in manufacturing where the flow of information is positively
correlated with the flow of value, the health care value chain includes data, which is considered
personal and private. The flows that are private and need to be protected may have a negative
correlation with the flow of value as perceived by patients. Some information could prove damaging to
the person who was forced to disclose it, or whose trust in the system was violated.

Every entity that is part of the health care value chain has a legal and ethical responsibility to use the
information transmitted through the value chain only in the way it was intended. Results from the
laboratory, X-Ray or MRI procedures will affect the physician’s prescription and choice of treatment.
Usually there are written policies stating how valuable patient-related information is to be used.
Participants who possess sensitive information need to obtain written permission from the patient to
release it to a third party.

A Model of the Health Care Value Chain

Figure 3 shows some of the participants in the health care value chain – or more correctly chains -
linking the various stakeholders in the health care system. It should be clear that these value chains are
neither linear nor sequential, and they could be circular or iterative. They generally follow the flow of
information disseminated through the described web of connections among the various participants. If
a connection is blocked, or if the information transferred is delayed – or worse – is the wrong
information, the value chain will suffer, or be broken, hurting one or more of the participants. Thus the
patient and their health condition is the most likely to suffer, but other participants may be victims in
terms of lost reputation or more directly when litigation (a malpractice suit) is involved.

The first two participants comprising the shortest value chain are the patient and their exchange with
the health care provider, or physician. The patients generally initiate the exchange and are the
recipients of the health benefits expected at the conclusion of the exchange. They are more willing to
provide important, if private, information to their physician – especially if they feel confident that the
information is needed to assist the physician in arriving at a correct diagnosis. Implicit in this sharing
of information is the belief that the physician will keep that information secure, and that it will be used
for the purpose intended for it by the disclosing patient. Another important aspect of this information
exchange is the patient’s belief that the information shared is actually accurate, and relevant to the case
at hand. It is entirely possible for a patient to provide information and describe symptoms that are
unrelated to the patient’s current problem, thereby increasing “noise” and confusing matters rather
than helping the physician. The health care provider, assuming they got the right information from the
patient, must contribute to the value chain by first correctly diagnosing, then prescribing a treatment
plan. The patient and the health care provider represent the simplest value chain, and the chain consists
of numbers 1and 2 in Figure 3.

In many cases, a prognosis involves a regimen, which includes prescriptions. That involves a
dispensing pharmacist and a plan for taking the medication – both in terms of dosage and other
relevant information. The pharmacist may or may not know what other medications the patient takes
and what interactions may result from taking the most recently prescribed one. Clearly the pharmacy
enters the value chain and creates a new variant. The numbers 1, 2, and-3 in Figure 3 represent the
expanded value chain.

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A third value chain is formed when the health care provider needs to obtain additional data – either by
questioning the patient or by providing the means for additional data collection. That may be the case
even when the patient provided correct and accurate description of their symptoms. Such added
information may involve prescribing a battery of diagnostic tests. As soon as such a diagnostic test (or
a battery of tests) is prescribed, other participants enter the process. Obviously these participants need
to know what is expected of them and feel that they must have the right information about the value
delivery chain. The value chain now has at least four participants, with medical laboratories, equipment
manufacturers and diagnostic service (X-ray, MRI) providers.

Similar to the above, but still another potential value delivery chain involves providers of holistic
medicine (alternative medicine). Such providers may come after the patient followed the traditional
medical. More recently, providers of acupuncture and other alternative medicine providers joined the
value chain. The new value chain may have anywhere from four to seven participants with a flow of
information moving both sequentially and iteratively. The value chain now extends to include one or
more of the participants numbered 3a, 3b, or 3c in Figure 3.

Hospitals are also large repositories of medical information, and since they house the patient, are a
major change in the nature of the value chain: This fourth version of the health care delivery chain
moves the services of the chain around the patient, much like the product moving through the value
chain. The patient is now an object of the process and their health and response to the treatments
determine greatly the outcome of the value chain, which now extends to numbers 1-4 in Figure 3.
Within this value delivery chain one can include the new outpatient surgery centers, assisted living
institutions with on site medical attention and care provisions, nursing homes and hospice care. A new
class of health care delivery care is thus formed.

When the concept of health insurance developed in the late nineteenth century, another party joined the
value chain. Though on the face of it added greatly to the value chain by providing resources,
affordability and insurance they also demanded access to what was once private information. For
example insurers may demand diagnostic data before covering tests ordered by health care providers.
They may refuse to cover a more sophisticated procedure if a less expensive one could be used to
evaluate the condition. Thus an MRI may be approved only after a simple X-ray has been done, and
has failed to resolve the issue. The value chain now extends to include numbers 1-5 in Figure 3.

Health care insurers affect the range of factors that affect consumption of health care services. When
cost reimbursement is available through such third party payers, there is less reward for search. Indeed,
there may be penalties for search and therefore a negative impact on the value chain. For example,
when a patient selects a provider outside the pre-approved network of providers the patient must spend
time to complete extra forms then wait for reimbursement. Choice therefore may be reduced to
selection of a participating provider, in terms of the insurance plan, rather than the based on the
reputation of the health care provider. The question as to whether the value chain is positively or
negatively impacted depends on the specific circumstances and so remains open.

Where there are concerns for privacy of information, insured consumers may engage in a balancing act
between paying for health care expenses out-of-pocket rather than disclose the use of these services to
insurers in order to get reimbursed. Test for HIV or mental health care may be two examples where
some patients might prefer paying out-of-pocket so as to not file for reimbursement.

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This is further complicated by tax regulations, which allow use of pre-tax dollars in health-care
spending accounts for qualified health care payments, deductibility of other costs, and no deductibility
for still others. Timing medical care to coincide with income tax filings and coverage by
reimbursement plans is also a consideration.

We know relatively little about how reimbursement by insurers affects the value chain in as much as it
affects the search for, choice, and consumption of health care services. This is surprising, given the
large portion of health care costs that are paid for by third parties.

In the United States, most health insurance for employed persons and their families is provided through
the employee’s employer and their negotiated benefit program. Often times, these policies are a
product of negotiations between the employing organization or company and the insurer. As such, the
larger organizations may be able to extract better terms for themselves in the form of lower premiums,
or better coverage for their employees. The benefit package offered to employees is part of a group
policy designed to average risk over the whole employee pool. Employees who qualify for the benefit
usually cannot be denied coverage. The sixth health care value delivery chain now extends to include
numbers 1-6 in Figure 3

The insurance intervention in the health care transaction generates another value delivery chain that is
markedly different than the chains described above. The ability to pay out of pocket for health care
generates the concept of customer life-long value to the health care provider. The more than 40 million
Americans who do not have medical health care are clearly in that group, but in fact, so are all the
insured individuals whose health care providers do not participate in the insurance programs. In
addition to possibly making the value chain shorter, it is conceivable that in consuming health care
services consumers base their search, choice and consumption decisions on a range of factors that
weigh availability, cost, convenience, quality, reputation of providers and at times, privacy issues. All
these considerations change again the nature and shape of the value delivery chain.

While the decision process may vary by the specific health care need, the appropriate use of different
providers, the ability to pay can affect the chain. A physician may prescribe medication, but if the
patient cannot afford to buy it, or is forced to seek cheaper Canadian drugs on line – affects the value
chain, which we identify as a variant of the third value delivery chain (1-3 in Figure 3
Third parties often reimburse patients and the health care provider. In order to be reimbursed, the
insurer must be informed of the service provided. When the insurer is an employer, it may inhibit
certain consumers from requesting reimbursement for privacy reasons. In a Web-based economy the
information is transmitted electronically making the privacy issue that much more frightening, as
people whom the patient may not even know, become aware of the both the provider, and the kind of
service provided.

The choices available to employees and employers in the selection of third-party health care insurance
programs are faced annually by growing numbers of employers and employees. This is true of both
individuals with health insurance, as well as those without access to such insurance. All are facing
increasingly complex and expensive situations. Comparing health care costs and benefits may affect
the search and choice of third party providers as well.

Life and disability insurers can also be a part of the chain, and would routinely request medical
information regarding the patient from their physician and sometimes may even require a separate

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examination. Insurers have a strong financial incentive to obtain medical information before issuing a
policy that could create a large loss.

In the mid-1960’s, the Federal Medicare and Medicaid programs turned the government into the largest
health care insurer in the country. The most recent budgets for these so called entitlement programs
amount to $250 billion and $300 billion respectively. The Federal role in the health care value chain is
constantly increasing. Most recently a provision for supplying drugs was initiated ensuring an
increased role in the health care value chain. The database of medical information has grown to
massive proportions over the years.

The use of private medical data by insurers can be a negative affect on the health care value chain
whenever disclosing of such information infringes, or is perceived as infringing on the privacy of the
patient. Third party insurers use patient information in several ways. First, the originating medical
complaint and corresponding diagnostic findings (identified during the first encounter between patient
and physician) is used to support the request for reimbursement. Insurance coverage has limitations
(for example, it typically does not cover work-related injuries) so the insurer has a right to verify that
the visit is for a condition, which is actually covered by the policy. Insurers may also exclude certain
conditions when issuing a health care policy, so the both the employing organization or company has
an interest in verifying that the diagnosis is not exempt from coverage.

A more recent development in the use of medical information is the concept of disease management.
Certain diagnoses lead to increases in future medical care costs and therefore to future financial losses.
Some insurers believe that intervention and better risk management can reduce such losses. To that
end, they might want to identify these conditions as early as possible identifying beneficiaries who
they feel will impact from such a program.

Thus, health insurance companies have become large repositories of medical information with an
uncertain impact on the value chain. Insurers feel that they need to have information about diagnoses
and patient responses to treatment plans. Patient behaviors and compliance with the treatment regiment
are also deemed relevant. The massive amounts of data collected drove insurers to being the first ones,
historically, to adopt computerization of medical records.

Another use of the data affecting the value chain is an outgrowth of the medical health care cost
reimbursement program. Insurers and other agencies use the data for allocation of resources and
program development. Medicare has established norms of practice patterns based on a provider’s
specialty. Physicians whose pattern of practice falls outside the norm can be subject to audits and
monetary penalties.

Pharmacies keep extensive records of all prescriptions filled by their customers. Most health insurance
companies monitor these by using real-time authorization systems. Patients who try to fill prescriptions
too early are usually denied. Federal agencies are particularly interested in so-called controlled
substances, such as narcotics and amphetamines. Some states require that providers use a special
prescription form for these drugs. In New York State, the prescription is in triplicate, with one copy to
the patient, one for the provider’s file and one to the state.

Pharmaceutical manufacturers spend million of dollars tracking prescription behavior of health care
providers. Tracking prescription-filling records, which are also published in aggregate allows insurers
to develop nation-wide norms. They spend many more millions trying to elucidate the thought

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processes of prescribing providers and trying to influence their behavior. They sponsor medical
research in the hope that the studies will demonstrate superiority of their medication over the
competition.

Medical equipment manufacturers are in a situation similar to pharmaceutical companies. They design
and produce products that have medical applications. They need information from providers and
patients so as to know what the future needs of patients are. That knowledge both improves the
performance of the value chain but at the same time allows them to market medications directly to
providers, social workers, home health agencies, nursing homes and directly to consumers.

Medical service vendors include companies that provide infrastructure support for physicians and
hospitals. Examples include physician billing companies and temporary staffing agencies. They are
usually in very competitive markets with little differentiation. Value chain efficiency and effectiveness
increases as information about potential customer needs provides a marketing advantage. That
advantage, however, comes with a caveat: such agencies often have a difficult task in controlling
private information.

Virtually every piece of data that a billing company receives is privileged, and it is common for the
data to transmitted thousands of miles over the Internet. Security at all stages is critical. Providers of
alternative therapies are a growing segment of the provider population. They tend to do more direct to
consumer marketing, not surprising since most of their customers pay out of pocket.

In addition to provider records and test results, At times the information may be of a special nature
such that a government agency has a fiduciary responsibility to be aware of patients with contagious
diseases. Psychiatric patients who feel compelled to harm others must be identified

Implications for Marketers

This paper has investigated value as the foundation of the value chain and has explored several
perspectives on value. Three main elements of value are important: delivering superior value, the
customer’s perceived value, and the lifetime value of the customer to the firm. It has also delineated
differences between the supply chain and the value chain. The value chain is based on the supply
chain concept but takes the perspective that at each stage, value is created for the ultimate consumer.

The value chain concept recognizes the differences between the business-to-business elements that
comprise the value delivery network and the business-to-consumer element that completes the value
chain.

The literature reviewed points out that a value chain will compete with others and that members of the
value chain must free themselves from the transactional model and realize that their welfare lies with
the success of the chain.

All of the organizations in the value chain are important for service success – thus companies that build
health care value chains must select and evaluate each chain member. If a value chain element has
problems, it will affect the entire value delivery network and the outcome to the patient. An incorrect
result from a diagnostic test or surgery on the wrong organ will have a crucial impact on the health care
delivery system.

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Each chain member must be successful for the chain to succeed and each member should think and act
beyond its narrow scope to help other chain members. For example, by consent and design, radiology
should prepare the patient for the next step “Here’s how the physician will use this and this is how long
it should take.” They should avoid divulging information that – by consent and design – they should
keep confidential. Such ‘beyond the boundary’ action will make the value chain more effective and
may increase perceived consumer value.

Organizations that seek to maximize their self-interest should recognize that maximizing the chain’s
performance will benefit them more in the long run than a temporary success in a transaction. It is
clear that the win-lose view is unproductive. In contrast, investing in their mutual self-interest will
reap benefits. In the era of increasing government and third party cost containment, the more efficient
health care value chains will have the advantage. Those without efficiency and effectiveness will
ultimately fail.

In delineating the value delivery system and the value chain, the relationships of importance here are
both interorganizational relationships and consumer relationships. Since consumers expect the
organizations to provide services successfully without concern about problems, organizations should
strive to reduce behind the scenes problems. Since the ‘retailer’ ultimately shoulders the
communication with the patient, the hospital or physician’s office is in a position to determine a
patient’s level of satisfaction. By handling the bulk of the behind the scenes details, providing clear
and appropriate patient information, and showing care and concern, the office or hospital can increase
perceived value measurably.

Since consumers tend to blame the organizations for unforeseen problems that interfere with service
success, those organizations should communicate their efforts to avoid problems, before they become
problems. In some cases, it may be necessary to reorganize the office or hospital to provide this kind
of interaction. In hospitals, the idea of a patient representative may serve this function and bolster the
value delivery of the organization as well as its perceived value.

All of the organizations in the value chain are important for service success. Marketers should assess
each organization’s contribution and value like ‘lifetime customer value’ to decide which chain
members should get the most attention. As the value chain matures, partners who were once vital may
assume less importance. The major player in the value delivery system, has the responsibility of
evaluating performance continuously and making changes when necessary.

To maximize a health care provider’s profits, estimating a patient’s lifetime value is the first step in
proactively marketing to that patient. Certain patients will be candidates for profitable follow-up
services like fitness or wellness training, physical therapy or even plastic surgery. Those patients with
a high lifetime value should be protected and retained. Moreover, patients like them should be the
prime candidates for recruitment.

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Figure 2: Health Care Value Chain – Representation
(Adopted from: Porter, Michael E., (1985), Competitive advantage: Creating and sustaining
superior performance. New York: The Free Press.)

Developing HC Capability HC Delivery: Treatment

Developmewnt
Skills’ Certif- Location Training- Need Diagnosis Treatment Health
Acquired ication Office & Plan Restored
Selected Expressed
s
Firm Infrastructure

Human Resources Management

Technology Development

Procurement

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