Porter's Five Forces Healthcare Industry

Competitive Rivalry:

The rivalry within the healthcare industry is very intense within pharmaceutical companies and insurance companies, while being less intense amongst hospitals (certain exceptions exist). Amongst hospitals, the competition is not as intense due to the fact that within a certain area there is only one hospital available to individuals. If an individual becomes sick, there is usually one hospital that individual can go to. However with the recent trend of numerous urgent care centers in major metropolitan areas, we can see an increase in competition. In cities like Los Angeles, Chicago, New York, we have seen independent urgent care centers being open due to the fact that most of them do not accept insurance, and they are essentially cash businesses. Some of these urgent care centers, provide faster service (avoiding wait in ER). In this essence, the urgent care which has the cheapest prices and best care seem to win. This win decreases the profits of major hospitals who usually have urgent care centers on-site.  In regards to the pharmaceutical companies, the competition within rivalries is intense. Each company is spending a tremendous amount of money within their research and development department, so that they can be the first to develop a new drug. Within the pharmaceutical industry, the first company that develops a new drug will get the patent to make a the drug for a certain amount years, therefore eliminating their competition. Within the healthcare insurance industry, the competition is very intense. Every insurance company is continuously bidding with companies to sell their services. However, most companies only select one insurance company, therefore making the competition intense. Since, most Americans only choose one insurance policy provided by the company, there is a strict competition that each company wants one of their insurance policies is chosen by the company.

Pressure from Substitutes:

In the healthcare industry, the pharmaceutical industry profits are greatly affected by substitutes after the patents of drugs has expired. When the patents expire, all pharmaceutical companies have the opportunity to make the drug. By allowing all companies to make the drug, this reduces the profits experienced by the sole company.  In regards to insurance companies, substitutes do not really affect them. In America, most individuals obtain healthcare insurance through jobs. Most companies only have a certain type of HMO or PPO insurance plan to choose. Therefore, the plan is usually chosen according to the persons finance. However, there is usually only one type of PPO or HMO within a company. Substitutes usually affect individuals who are self-employed and purchase their own insurance. In this situation, individuals have the opportunity to choose from a number of providers. In the U.S., the number of individuals who purchase their own insurance is insignificant.   In regards to the healthcare sector, substitutes do not usually affect the field. For example, if a patient has to obtain an ankle surgery, he or she has to go to a surgeon. Now, one can go to any physician they would like, but that would be more of competition amongst physicians. In recent times, there are certain substitutes such as alternative medicine which treat primary care problems. However the amount of individuals who believe and practice this type of medicine is very negligible when talking about substitutes.

Threat of New Entrants:

Within the healthcare industry, the threat of new entrants is very tight. For example, pharmaceutical companies must have the initial capital to invest into their research and development department to develop new drugs. After developing these new drugs, these companies must also deal with the policies that must be meet by the government agencies before the drug is released.  When it comes down to insurance companies, the threat of new entrants is also limited. This is due to the fact that there are many federal and state guidelines that these insurance companies must follow to remain open. These policies make it very hard for anyone to open an insurance company. Besides federal and state regulations, new insurance companies would need to have a significant amount of capital to be able to attract physicians to their network. Having to compete with the large insurance companies like Aetna, Kaiser Permenante, and Blue Cross, would take a require a strong supporting cast and the necessary capital to draw other physicians from their existing network. In regards to actual healthcare, this field also seems to be very tight for new entrants to enter. This is very difficult due to the fact that the US has very strict guidelines and regulations set by the government to open a hospital. These guidelines also prevent the huge monopoly of hospitals being open in a certain area by only allowing certain amount of hospitals to be open within a given area.

Bargaining Power of Buyers:

In the field of healthcare, it seems as though the bargaining power of buyers is very limited. People will get sick and suffer from diseases whether the economy is doing well or bad.  Individuals do not have the opportunity to determine when they get the flu, or need a knee replacement. Individuals are at the mercy of insurance companies, pharmaceutical companies, and hospitals to provide the best quality of care. Now individuals have the opportunity to choose a certain hospital or insurance company over another, but since there are limited amounts of insurance companies within a network or limited amount of hospitals within an area it becomes very hard to have buyer power.

Bargaining Power of Suppliers:

As a physician, I have seen that doctors have a huge bargaining power over insurance companies. If I do not join a specific network that means I will not be able to accept a certain type of insurance plan. Now if a certain amount of physicians do not join a specific network, it will limit the amount of individuals who would want to join that insurance network. For example, it a physician chooses not to accept a specific insurance plan he will be restricting a certain amount of sick people, thereby decreasing the amount of companies buying that insurance plan.  In regards to pharmaceutical companies, the bargaining power varies. When a company delivers a new drug in the market, it needs the hospital to carry the drug to make its profits. In this essence, the hospital can decided whether or not they want to carry the drug. But if a hospital wants to attract new patients and keep their old patients, they must have the latest medications. So the hospital needs the pharmaceutical companies, and the pharmaceutical companies need the hospitals. If the hospital decides to carry it, the pharmaceutical company wins, because it is a patent drug distributed by the hospital and the pharmaceutical company can charge the higher price. However, when the patent expires and the drug becomes a generic, the bargaining power of the supplier becomes less effective because everyone can carry the drug, dropping the price of the drug. Since there is a shortage of physicians, the bargaining power of physicians to hospitals is huge. Hospitals must maintain competitive salaries for physicians, because they need to have quality physicians to treat their patients. If a hospital chooses not be competitive, physicians will search for other hospitals to work.  Once a hospital loses a certain amount of quality of physicians to another group, their patient population has the choice to switch to the new group. If your patient population moves to another group, you will be decreasing your profits. This will cause hospital profits to decrease. However, in certain areas such as New York and Los Angeles, where there is an abundance of physicians, the supplier power is decrease. In areas such as these, hospitals know that if one physician leaves they can find another physician because there is an abundance of well-trained doctors. Therefore, their salaries do not necessarily have to be the extremely high. Lower salaries sometimes mean lower expenses, thereby increasing profits.