J&J Health Care Systems--Beyond the Supply Chain

With its new Health Care Systems company, J&J has created a support function that offers services as well as products and leverages not just high volumes, but breadth of product as well.

by David Cassak

• Past efforts by J&J to create a support function for its operating companies failed because of lack of relevance to the strongest companies.

• The new Health Care Systems may succeed where earlier efforts haven’t through a coordinated contracting function with pricing authority over operating company products and a program to develop services.

• One challenge: creating programs and services relevant not just for an elite of customers, but for the majority of providers in the marketplace.

• Key to JJHCS: the ability not just to aggregate large volumes of purchases, but to link products across a broad continuum of care consistent with the new vision of managed care providers.

When Columbia/HCA Healthcare Corp., the country’s largest proprietary hospital system, wanted to contract for surgical instruments, it told s: where Hospital Services focused almost exclusively on enhancing customer service and distribution levels, JJHCS also tries to help customers improve the quality of the care they deliver, either as providers or payers, and to improve patient outcomes. And where Hospital Services concentrated largely on hospitals and institutional providers, JJHCS is also calling on MCOs, integrated delivery systems, and government customers.

Indeed, JJHCS doesn’t so much replace Hospital Services as significantly expand on it: the company was created in early 1995 through the merger of the former Hospital Services company, dealing with supply-chain issues and logistical services, J&J’s Advanced Behavioral Technologies, (now J&J Health Management Division), its wellness/prevention business, and the original JJHCS, a pilot program which created a common contracting arm for J&J’s pharmaceutical businesses.

The most striking example of this expanded role: a broad contracting function that gives JJHCS pricing authority for all of the J&J operating companies—a significant advance over Hospital Services whose corporate marketing program could suggest product bundles but had no control over contract terms for and couldn’t actually sign contracts on behalf of the operating companies. Says Longstreet, “We realized that we needed a simplified way to interact with integrated systems and MCOs. We’re not just a supply chain, but a contracting organization, doing account management and pricing. Our customers can now get access to the broad range of J&J’s products, not just [the medical/surgical] products but also pharmaceuticals and [in vitro] diagnostics through a single contracting source.”

“One of the things we heard most clearly from our research is that our customers wanted one point of contact and a consolidated approach to all of the J&J resources,” notes Cliff Holland, JJCHS’ executive vice president of sales and marketing. The new structure doesn’t replace the contract teams at the operating companies. Having divided the country into 40 zones, JJHCS account executives call on customers to determine which of the operating companies they want to work with. Then, in conjunction with those companies, JJHCS crafts specific agreements. “We do the contracting and [the individual operating companies] do the pull through,” says Longstreet. “We work as a team.” Moreover, he insists, the specific terms JJHCS negotiates on behalf of the operating companies are determined by guidelines set by those companies in the form of a pricing matrix. “Sometimes those guidelines are out of sync with what the market wants and we’ll talk to them about adjusting them, but if there are exceptions, we always go back to the operating companies first,” he says.

But Does This Benefit Market Leaders?

Individual J&J operating companies have in the past experimented, on a limited basis, with cross-company account management that gave pricing authority to a single entity: Ethicon, for example, has helped position its sister MIS business, Ethicon Endo-Surgery, through the formation of a single contracting entity. And in 1994, several of J&J’s pharmaceutical businesses, Janssen, Ortho Biotech Inc.and Ortho McNeil, experimented with a single organization, the original JJHCS, to call on PBMs and MCOs.

Still, the ability actually to sign contracts is a significant shift for JJHCS. Historically, operating companies, particularly those with large market shares or high profitability, have been reluctant to give corporate marketing programs the freedom to negotiate pricing, fearful of the impact on an individual company P&L, and concerned that broad, corporate-wide bundles would only work to the detriment of well-positioned companies.

Companies like Ethicon in particular rebelled on the grounds that the strategy was most often used to position weaker companies by leveraging stronger ones or that customers would only agree to buy products from smaller companies if they received a price concession from a market leader. Whether driven by customer demand or the needs of smaller sister companies, the stronger J&J companies rarely saw sufficient benefit from a coordinated program to justify the price/margin concession they wouldn’t have had to make as a stand-alone company.

Such concerns still haunt JJHCS. Ethicon executives, for example, still worry that they’re giving away four or five points in margin to get exactly the same market share they would have without the coordinated contracting, say executives close to the company. But JJHCS officials insist that they try hard to pay attention to such concerns, including concerns about financial impact. “This wasn’t something developed in a vacuum and dropped on the laps of the operating companies,” says Cliff Holland who, prior to joining JJHCS, spent 20 years at Ethicon, most recently as vice president of sales and marketing. “To say that all concerns are out of the way certainly wouldn’t be accurate. But we’ve done our best to get the operating companies involved, and this has given them a sense they own the process, and they support it better.”

Interestingly, it was the experience of J&J’s drug companies, says Longstreet, that convinced the device companies that ceding pricing authority was no big deal. “When we launched [the pharmaceutical pilot program], we told them [the drug companies] that if they had any problems, come back and see us,” he says of that earlier initiative. “And we got maybe two calls all year.” When discussions arose about giving the new JJHCS pricing authority, “it was the pharmaceutical companies who said to the other companies, ‘This is a red herring. Hold them accountable, but give it to them.’”

JJHCS officials insist that one key to allaying concerns is to make certain that JJHCS’ incentives are in line with those of the operating companies. “We want to do what makes the most sense for them,” Longstreet goes on. “My job for Ethicon is to increase market share and gross profits. Even if the business isn’t growing because utilization is being managed more carefully, we’re counting on being able to show in the big accounts that share is increasing. If we can do that, Ethicon will be happy with us.”

A New Approach For New Customers

The focus on share growth is significant, not just because it’s consistent with the operating companies’ goals, but because it also suggests how the marketplace is changing. Indeed, JJHCS officials argue that market changes have made the most compelling argument to operating companies, even those with strong market positions, that a new approach is needed. “I think they understand the world is changing,” says Holland. “And those with strong market positions understand the magnitude of the job to maintain them. I think that the old days of ‘We can do it ourselves,’ is gone, and the companies are very receptive to new ways of thinking about their business.”

The dramatic consolidation of customers is one indication of this change. “There’s a whole new group of customers out there who want to work with suppliers in new ways, and it’s difficult to do that as individual companies,” notes Dennis Longstreet. In a lot of cases, the field organization at the operating company pushed hardest for the new JJHCS because it gives them increased leverage. But senior management at the companies, too, recognize that life is different. “They had begun to feel that it was getting harder to get a seat at the table as individual companies but that as a combined J&J, we’d get that seat,” he goes on. “We’re now on everyone’s top-five vendor list,” something even strongly-positioned companies like Ethicon or Ortho-McNeil can’t claim on their own.

That’s not to say that some J&J companies won’t have to give more in this new coordinated approach. “We’ve told them frankly that that can and will happen,” says Cliff Holland. “But if we’re going to broaden our involvement with a key customer, if we’re going to make them a bigger and better J&J customer, [the operating company] should ultimately benefit as well.” Such uneven treatment isn’t always expressed in price or margin either, Holland goes on. “Sometimes it’s in terms of program services or resources. But that’s all part of managing the total customer and not focusing only on what each operating company needs.”

A Broader Continuum of Care

The increased critical mass that comes with representing 18 companies rather than one is part of this new approach. But it’s not just that J&J’s customers are bigger, but that they are new kinds of providers—best exemplified by integrated systems and MCOs—that take a broader perspective on the episode of care. Unlike hospitals that tend to focus narrowly on logistics and customer service issues such as contracting, MCOs look across the spectrum of patient care and are more interested in programs that link diagnosis, treatment, and even wellness and prevention as part of a single continuum. “When we started this, we thought we were doing something unique because we weren’t just focused on the outpatient pharmacy side or on the inpatient logistics side; we were playing across the whole continuum,” says Longstreet. “But even we’ve been amazed [at how far this trend has extended.] Now hospitals are connecting with physicians and managed care plans in one system. As J&J, when we go into the hospital, we can now connect with that customer on the other side.”

“It’s interesting how times have changed,” Longstreet goes on. “In the old days, the pharmaceutical companies would never have teamed up with the professional [i.e., medical/surgical] or diagnostic companies. Now given this broad continuum of care, they see it makes sense to be included in something like this.”

And with this change has come a different, less insular attitude on the part of J&J operating companies, an attitude that collaboration doesn’t necessarily mean the end of autonomy. “We’re making a very strong effort not to be in the silos that have existed over the years,” says Cliff Holland. “I think we’ll see a lot more cross-sector, cross-company communication and sharing of strategies. Today, we regularly bring together the 18 company presidents to talk where the marketplace is going; two or three years ago, that would have been impossible.”

Ironically, Ethicon’s success in helping to position Ethicon Endo-Surgery was instrumental in showing other J&J companies how they could work together. While arguably driven as much by Ethicon as by its customers, the close collaboration is, says Holland, “an indication that while we like to separate ourselves as companies, customers don’t always see the market that way.” Customers who consider wound closure and endoscopy part of the same package don’t want to deal with Ethicon and Endo-Surgery as separate entities. “Similarly, we’re running into customers who want a single operating-room proposal and don’t want it carved up among ten different products.” Thus, when one customer recently wanted to link operating room instruments (available from JJPI) and sterilization (a Johnson & Johnson Medical Inc. product), JJHCS intervened to put the agreement together.

A Move Into Services

A more secure authority over contracting, including the ability to set pricing, is critical to the expanded capabilities of JJHCS. But the company’s most radical departure from Hospital Services has come in its move into an array of health management services, including prevention and wellness programs and disease management, designed to help J&J customers deliver care more efficiently, in some cases, and in others, actually generate additional revenues. Notes Dennis Longstreet, “We’re not just focusing on the products side of contracting. We also help them be more efficient in delivering care by focusing on cost-effectiveness, quality and patient outcomes.”

One such approach is designed to help hospitals manage selected departments more efficiently. JJHCS currently has several pilot programs in place to manage operating rooms and pharmacies, in the former case trying to lower the cost of some of the more costly procedures; in the latter, helping to establish formularies and implement appropriate utilization standards. Indeed, it is this broader approach that pulls in operating companies that historically would not have played with Hospital Services: as it expands its business beyond its fast-growing stent line, Johnson & Johnson Interventional Systems Co. , for example, may utilize JJHCS not just for contracting, but also to help customers design more efficient cath labs.

Earlier this year, JJHCS launched a pharmacy department management program with Columbia/HCA. Currently being tested in pilots at four hospitals in Virginia, Nashville, Florida, and Las Vegas, the program seeks to improve efficiencies in everything from ordering, distribution, and inventory to formulary creation and proper administration of drugs. “What JJHCS did,” says Sam Greco, senior vice president of financial operations at Columbia/HCA, “was to devote the resources in an area where we needed the help of a company that was experienced not just in pharmaceuticals but also in how products are delivered to and used in the hospital and how those products ultimately got to the customer.”

Critical to the program: an expanded sense of who the customer is. “It’s not just the patient, but also the nurse administering the product, the pharmacist dispensing it, the physician prescribing it,” Greco goes on. “We were looking at the entire process and how it could be organized more efficiently.” That might mean anything from helping physicians better understand when a generic equivalent is available to planning more efficient distribution and inventory modules. “And we set some aggressive goals,” he says. “When you add in the cost of labor and the drugs themselves, we expected to see a 30-50% improvement in the process.”

Though less than a year old, Greco insists the program has already delivered results. “Whether [efficiency] has been improved 10% or 50%, we don’t know. But there’s a widespread perception that things like accuracy, service levels, and particularly communications haveimproved,” he says. “Physicians believe they’ve become more productive as a result of this and we get the benefit of being perceived as a better place to work, a better place to practice medicine.”

The next challenge: to replicate the program at Columbia/HCA systems around the country and at individual hospitals within those systems. “Our goal in every market is to expand the program so that ultimately we have a market-wide formulary,” says Greco. Columbia/HCA knows that many of the physicians at WestSide Hospital in Ft. Lauderdale, the Florida hospital in the pilot program, also practice at other Columbia/HCA hospitals in Broward County. “You can never have one standard formulary, but if we can get compliance on 80% of the items, we’re coming pretty close to standardization.”

A New Skill Set

Ultimately, says Greco, Columbia/HCA is using such programs “to put ourselves in the position that if the industry ever moves toward a fully capitated model, we’re prepared.” In the process, it is defining a new kind of relationship with a select group of suppliers—a group that, for Columbia/HCA, includes General Electric and Baxter as well as J&J—that is increasingly exclusive in the fullest sense of the term.

Though they speak anecdotally of programs in the OR and cardiac cath lab, JJHCS officials won’t specify the departments for which they have developed such management programs, though Cliff Holland notes, “We’ll probably stay within those areas where we have some [product] expertise and relationships with physicians and other clinicians.” Given the importance of compliance in such programs, he argues, “we’ll concentrate on those areas where we have a professional sales force at an operating company that has the relationships with the physicians.”

In each of these programs, JJHCS serves as a kind of quarterback, to use Longstreet’s term. “We develop the relationship with the customer and do some consulting and implementation as HCS.” But the company also works with individual operating companies, Ethicon or JJPI, for example, in OR management, and will even call in outside consultants. In June of 1995, JJHCS signed an alliance with Value Health Sciences, a division of Value Health Inc. , to provide data analysis in the management of clinical services.

“Value Health is good at coming into a managed care organization or large hospital, looking at the databases those organizations have and analyzing the cost drivers, whether in a disease state, like diabetes treatment, or in a department like the OR,” says Longstreet. “They make sense out of the data, which allows us to create programs to adjust behaviors.”

Under the agreement, Value Health will develop a dedicated J&J unit that will focus on working with specific J&J clients, much as it did with Pfizer under an agreement signed two years ago. Value Health isn’t providing disease management services per se, says Longstreet, who adds, “We prefer to call it health-management services because we’re incorporating more than just pharmaceuticals.” But the company will provide consulting and related data analysis services, about procedures and practices, that J&J will use to develop the programs it sells to customers. Value Health also has large databases of benchmarking data that can help providers to define best practices.

The business analysis capabilities imported from Value Health—JJHCS is also building an internal team to develop the same skill—are only one of a number of new skills that, given its historic product focus, JJHCS will have to create. Another is the kind of service-related consumer marketing that MCOs need. “We’ve got a lot of expertise in consumer marketing in our consumer companies, but there’s much about the member attraction/retention issue that we don’t know about because we haven’t had extensive experience in the service marketing side of the business,” says Cliff Holland.

Indeed, JJHCS officials make clear that these new service offerings are much more than the kinds of product-related value-added services suppliers have historically offered to customers. In many of these programs, JJHCS will be compensated either through the direct payment of fees or through risk-sharing arrangements in which JJHCS captures some of the savings the program helps generate. “The old value-added days are behind us,” Holland goes on. “We need somebody like Value Health that can help us look at the cost levers within a therapeutic area, identify which are important to our customers, and then build programs around them.”

Last October, JJHCS announced a joint program on women’s health with HIP of New Jersey, which will offer health risk appraisal services to women around the state. One goal of the program: to give HIP access to J&J’s enormous marketing clout to help it attract new patients. As part of the program, HIP now states in its advertisements that it has teamed up with J&J to improve the health status of New Jersey women, utilizing J&J’s expertise not just in health care services, but in consumer marketing as well. (see sidebar, pg. 40).

A Product-Oriented Approach

As historic barriers between product segments and even between suppliers and their customers begin to come down, the ability to offer services seems a natural evolution for JJHCS. “Focusing on contracting, we’re really affecting only the 20 cents of each [health care] dollar that is the product component,” says Longstreet. With health management services, “we’re attacking the 80 cents in the delivery and provision of care. And what’s interesting to us is it’s this part of our program that the integrated delivery systems, the big hospital provider networks, are interested in our helping them with.”

Still, one reason for going outside to companies such as Value Health: the very different nature of the service business for a corporation that has historically focused on selling products. Cliff Holland acknowledges that “the service business is still a bit of an unknown for our customers in their dealing with J&J and even frankly for us as we evolve. We’ll have to see where the fits are and the competencies we can bring.”

Indeed, there’s a kind of schizophrenia in JJHCS—a contracting arm focused on cost savings for customers, and a services arm that looks beyond simple price savings and generates revenue. Cliff Holland acknowledges that, at least in the short term, contracting is often what customes want most. “In the early stages, the most important part of the program is the simplified contracting for customers, the better coordination and alignment of the J&J companies.” In time, however, he notes, “We need to cross the bridge to aligned incentives and appropriate use. Great products are, by themselves, not enough, and that means offering customers service programs that will help them reduce costs and improve care.”

Still, J&J is, when all is said and done, a product supplier. Though he’s optimistic on the potential of the service program, Dennis Longstreet acknowledges, “J&J is an $18 billion products company. We’ll do maybe tens of millions in service revenue. That may eventually grow to several hundred million, but this company will always be built on product sales.”

And that, in turn raises an issue for JJHCS and its partners in these new service programs: what’s the relationship between the stated goals of the program, whether in women’s health or pharmacy management, and the desire of individual operating companies to sell more products?

Talking about the HIP program in women’s health, Longstreet notes, “If this was simply a deal to get every women in New Jersey on an Ortho contraceptive, it wouldn’t have had any appeal for HIP. The fact that we sell contraceptives isn’t going to help HIP attract new members. There are a lot of companies that sell contraceptives. What we offer is health screenings and other services that can identify at-risk women.”

Moreover, he says, the fact that JJHCS benefits from increases in enrollment—the company takes a fee for the incremental membership it attracts—helps convince customers that J&J’s real interest is in sync with theirs, not in selling more products. “There’s always that initial skepticism,” says Longstreet. “But we’re in there, not as a product vendor, but as Johnson & Johnson, with all of the reputation behind that name. When you combine the fact that our product offering is so broad and that our incentives are aligned with theirs, the products are usually an afterthought.”

Still, JJHCS officials acknowledge an implicit connection, if only because given J&J’s limited resources, they’re more likely to identify as potential customers those organizations where a program can specifically benefit one or more operating companies. “We target those organizations that do the best job for J&J products,” says Longstreet. While some of the parts of the HIP program have no product component, he goes on, “We think the business relationship that results from health management services has a positive side effect on products, that doesn’t require a specific contract for products.”

A Model For a Consolidating Market

As for JJHCS’ partners, neither Columbia/HCA nor HIP of New Jersey see increased product purchases as a quid pro quofor the program, but neither are they naive enough not to realize where J&J’s ultimate interest lies. Notes Sam Greco, “ I guess we got over those issues early on. In the long run, if the environment moves toward capitation, we’re going to need predictability in our costs. You can’t do that with 1,500 or 2,000 suppliers. You need to get the number of vendors down to a controllable number, and in doing that, we’re going to do business with companies that have been attentive to our needs.” With additional deep price discounts getting harder the more successful it is in negotiation with suppliers, Columbia/HCA executives have to begin to focus on issues such as productivity, for which they’ll turn to suppliers for help. “If the by-product of their helping us become more productive is they sell us a greater portion of product than they otherwise would, I don’t have a problem with that,” Greco says.

Cliff Holland argues that as long as the customer achieves his goal—which is often reduced cost—the fact that J&J sells more products doesn’t make the program a bad one. “First, in most cases, we’re bringing them products that are number one or two in their markets, so they’re great products,” he says. “Second, our objective is to help them improve quality and reduce overall cost. If we can do that, we’ll forge an enhanced relationship and from that relationship our share will grow. The key is to be explicit with customers up front about our objectives and expectations.”

Indeed, says Holland, one important difference between Hospital Services and JJHCS is that while the former was focused on process—on the efficient workings of logistical services—the latter is much more market- or key-customer-driven. “We spent a lot of time identifying which market segments we had to be closest to and who were the major players in those segments,” he says. That effort resulted in the identification of 300-350 key accounts among MCOs, integrated systems, and voluntary and proprietary hospital groups.

Thus service programs like the one with HIP of New Jersey have a strong customer focus, even as they generate revenues for JJHCS. Says Dennis Longstreet, “We want to get compensated with a reasonable fee. But what we’re really trying to do is to help that customer win in the marketplace.”

The recent consolidation among payers and providers—from the growth of Columbia/HCA to the merger that created AmHS/Premier/SunHealthto the mega mergers in managed care—validates JJHCS’ vision, say company officials. “That speaks loud and clear for what we’re doing here,” argues Holland. “Extraordinary events require extraordinary responses from suppliers and the only way we can make that extraordinary response is by bringing together all of the resources of J&J.” Adds Longstreet, “Customers that large can take full advantage of a total J&J approach. They can put together programs to standardize products and improve the quality of care that almost require that we respond as a single entity, rather than a series of operating companies all trying to develop the same program.”

Too Far Ahead of the Market

It is ironic that JJHCS’ launch comes at a time when Baxter, which started the logistics revolution, has decided to split the company in half, segregating its high-tech businesses from its distribution/hospital supply arm. JJHCS officials see no invalidation of the JJHCS vision in Baxter’s move. “I’m not fazed by it,” says Holland. “They recognized the same thing we have: that you’ve got to work in two distinct areas: good technology and effective cost management. They’ve chosen to do it in two separate organizations. We believe it can be done through one organization with the right amount of coordination and collaboration.”

But even if JJHCS is in step with the avant-garde in a rapidly changing environment, there is a risk that the company’s capabilities become more limiting than liberating the further they move along the continuum of advanced services. As they try to keep pace with the demands of customers like Columbia/HCA and AmHS/Premier/SunHealth, JJHCS runs the risk that its most ambitious projects place it far ahead of, and thus somewhat irrelevant to, the needs of most hospitals and provider groups. Notes Sam Greco, “These programs are hard enough to do when you own all the assets. Working with other [provider groups] where there isn’t that common ownership would seem to me extremely difficult.”

Indeed, critics, including some dissenters inside J&J, believe that in promoting its more advanced programs and services, JJHCS sometimes loses sight of the basic contracting most customers still want. Says one insider, “70-80% of the volume in [J&J] contracting is still med/surg. It’s traditional, old-style contracting, but you have to protect that base of business. If JJHCS spends too much time worrying about advanced service offerings, they’ll risk seeing this business go away.”

More to the point, even so-called “new” customers tend to behave in very traditional ways. Thus, most integrated systems, say industry executives, are still more interested in conventional segmented contracts than the kind of total health care approach implicit in JJHCS’s program. “It’s a great vision,” says one executive. “But where’s the beef today?”

The point isn’t lost on JJHCS officials. “There are still a lot of customers who are interested primarily in sitting down at a table and negotiating the best acquisition price they can,” says Cliff Holland. “Clearly we dorun into customers who, when we say we want to present a total J&J offering, aren’t ready for it. We understand that, and I think we’ve got to be flexible and ready to deal with anyone.”

But JJHCS officials also are counting on those more traditional customers ultimately following and embracing this broader vision. “I think we’ll continue to see plenty of negotiation around acquisition price,” says Holland. “At the same time, we’re clearly seeing our customers facing different challenges today. [Product] price is one portion of that, but they’re also interested in taking costs out of the process and keeping more covered lives moving through their system.” Adds Dennis Longstreet, “I think a lot of those customers are going to come along.”

An Insular Approach?

It’s the classic formula, Longstreet says: 20% of the customers are way out in front while another 20% are standing still. Those in the middle—the ones who represent the lion’s share of the marketplace—are, he goes on, “migrating pretty quickly on their own” toward the more sophisticated programs.

Indeed, JJHCS officials see it as part of their mission to bring customers to the next level. “We understand there’s a lot of structure and tradition at the customer level,” says Cliff Holland. “To get them to move to the next level you have to give them a pretty compelling value proposition. If we can’t do that, the blame shouldn’t fall on the customer, it should fall on us.”

The charge that JJHCS’ vision is relevant only for the most advanced customers raises two other, related criticisms from insiders: one, that JJHCS programs disproportionately benefit selected operating companies and, second, that the company’s management, weighted toward pharmaceuticals and biotech, lacks the experience and background in the kind of basic contracting that is at JJHCS’ core.

The charge that JJHCS benefits some companies more than others comes in two forms. First, that the kinds of programs JJHCS puts together, particularly the service offerings, tend to benefit pharmaceutical companies; second, that some operating companies, most notably Johnson & Johnson Interventional Systems, J&J’s high-flying cardiovascular stent business, and drug companies Ortho-McNeil and Ortho Biotech are treated with kid gloves compared to other divisions, allowed to not participate where they see fit. “It’s the same with customers,” says one executive. “The ones that scream the loudest get the most attention.”

Ironically, this executive claims, Ethicon, which was the best example of the hold-out on Hospital Services, has most often been asked to carry the burden in contracting situations. “Just because they helped position Endo-Surgery doesn’t mean they want to do it for every J&J company,” this executive says.

JJHCS officials deny that the programs intentionally benefit or disadvantage one operating company more than another, but note that some industry segments may be more aggressive in their use of such programs. “We’re very conscious of the fact that there are some programs that benefit the whole corporation and others that benefit individual operating companies,” says Holland. “We try to balance the portfolio, but there are always going to be programs that benefit only the pharmaceutical companies and those that benefit only the Professional companies [e.g., JJPI or JJMI]. This is different than Hospital Services that only represented the med/surg companies. We’re working on behalf of 18 operating companies.”

Still, if such biases exist, say some executives close to J&J, it’s because the senior management team at JJHCS all have backgrounds in the biotech and pharmaceutical industries. Indeed, of the top management, vice president and above, only Cliff Holland came from the med/surg industry. Given the importance of contracting at JJHCS, the prominence of pharmaceutical and biotech backgrounds seems to some an odd qualification. Says one industry executive, “When it comes to contracting for products, the only experience they [JJHCS senior management] had was in crunching theoretical models and pilot programs. If I were starting a contracting organization, I wouldn’t start it with biotech and pharmaceutical industry executives.”

A Competitive Edge

Moreover, say some insiders, this senior management structure gives the group an insular feel: senior executives are chosen not on the basis of relevant experience but because they’re part of an inner circle. Of course, all effective management teams are built around executives who feel comfortable working together. But, say critics, this insularity sometimes works against JJHCS’ stated goals of building long-term relationships. Recently, JJHCS came within days of signing a contract with a major insurer, only to have a senior JJHCS executive pull the plug at the last minute because he thought the terms were too generous. Says one executive close to the deal, “We had spent six months putting that agreement together and suddenly we had to sculpt fog to come up with reasons why the contract couldn’t be signed. That’s no way to build a long-term relationship, but it shows the thinking of someone from the drug industry, whose first instinct is to get as much as you can out of the product while the patent is still valid.”

Cliff Holland argues that the charge of insularity is unfounded. “If you look at the organization in total, there’s a broad mix of different backgrounds, from pharmaceutical to med/surg.” And Dennis Longstreet argues that of the 70 field executives at JJHCS, 40 are from either Hospital Services or one of the med/surg companies. Moreover he argues, it’s important not to bias the contracting process the other way, with a heavy influence on med/surg. “At Ortho Biotech, most of our business was on contract. Today, at J&J, 35% of the contracting covers pharmaceuticals, another 10% specialty products. It’s important to have them in the mix.”

Operating company presidents like Ortho Biotech’s Carol Webb or JJPI’s Don Grilli claim they see no unfair bias in the way JJHCS has built its programs. Says Webb, “They’ve only been operating for a year, but I think what JJHCS has accomplished in that time is phenomenal.” That may be because, bias aside, as JJHCS begins to incorporate a broader, more multi-faceted contracting and service mix, J&J companies will find another value in JJHCS: a vehicle to recapture some of the leverage lost to these new, larger customers who increasingly take a more aggressive stance in negotiating with suppliers.

Indeed, it’s one thing to say that J&J wants to be among the top five suppliers for any large customer and something quite different to say that it wants to come to the negotiations table and not feel at a disadvantage relative to the customer. For Columbia/HCA’s Sam Greco, the issue isn’t one of increasing leverage, but gaining access to the right people. “I see this as a strategy to get higher up in the organization,” he says. For most suppliers, the only point of contact with the customer is through a buyer in the materiel management department. “There’s little interest on the part of senior managers to understand J&J or want to work with them,” says Greco. “JJHCS took the initiative to bring this program to very senior executives here. They got access, we got solutions to some of our issues, and that’s different from buying product.”

For operating companies used to dealing with physicians and surgeons, the enhanced entry at different levels is key. Says Don Grilli, “Where orthopedic surgeons still control the [selling] process, we’re okay. But where they don’t, we need JJHCS to open doors for us.” Adds Cliff Holland, “It used to be that we’d go in and negotiate each contract and that was the extent of the relationship. Today at Columbia and other key customers, we’ve got connections at all different levels and different capabilities within the corporation for each of these [connections].”

That enhanced access allows JJHCS to provide a kind of competitive edge for the operating companies that Hospital Services never achieved. Where Hospital Services’ role as a provider of customer-service programs was essentially to make it easier for customers who had already chosen a J&J operating company to do business with that company, JJHCS can more aggressively create demand for products, thus giving companies an entry that they wouldn’t have on their own. Says Longstreet, “What we provide is access. We can get them on the formulary or on the contract and can do it better than they can on their own because of the breadth of J&J and because we’re more experienced at putting together performance-based, share-driven contracts. We provide a competitive advantage by making sure they don’t get locked out of any customer.”

A Value Beyond Savings

Beyond the broader contracting reach, JJHCS’ service portfolio also helps position the operating companies. “With the health-management services piece, we’re not just Ethicon or Janssen showing up once a year or once every two years to negotiate prices,” Longstreet goes on. “We’re there on a routine basis helping the customer deliver care and that provides a relationship that’s at a different level than the typical negotiation with a purchasing agent.”

But these new relationships and new points of contact also mean that operating companies and their customers will begin to assess the value in their relationships differently. Thus, one of the keys to the Columbia/HCA program is that while measurable dollar savings are an important goal of the program, program improvement per seisn’t necessarily defined in terms of such savings. Improved outcomes, efficient distribution systems, and the proper administration of drugs count, too. “Actual cost savings are important,” says Sam Greco. “But if, using a distribution station as opposed to an inventory site, we can make a technician more productive, that’s a demonstration of improvement. If, as a result of cleaning up our process, we make fewer errors in drug selection or, by getting the drug to patients 20 minutes earlier, we can improve care, that’s an improvement.”

The change implicit in such relationships can be stark even for JJHCS. “The first time I suggested to Cliff Holland that he share his P&L with me because there might be a way we could help him, a strange look came across his face,” says Greco. “But I’m willing to share our P&L with [JJHCS]. At the end of the day, we’re both in the same position: if we can’t get our cost structures where they need to be, we can’t price our product to be competitive.”

And that’s the nature of a true partnership: suppliers and customers seeing their interests aligned, not at odds. “Before projects like this came along, the glue that held relationships [between suppliers and customers] together was the fear on the suppliers’ part that they would lose business and, on our part, whether we’d be able to move the business if we had to in order to get a lower price,” Greco goes on. “Today, that glue is that we understand more about them and they understand more about us, as we both try to take advantage of the skills each party brings. There’s been a maturing process in all of this and I think we’ll use it more and more.”

Not Just a Product Supplier

But while he sees real value in Columbia/HCA’s new relationship with J&J, Greco, like other senior executives at large customers, tends to see that value not necessarily as J&J operating companies would, in terms of the features and benefits of the products they sell. Indeed, Greco notes that one reason JJHCS appealed to him was that company executives didn’t come in talking about products. “Usually when product companies come in to visit, all they want to do is talk about products. Frankly, we can get products at the price we need from anyone. When we look at that select group of partners, we’re looking for companies that can help us with our productivity issues. And what we found in JJHCS was the willingness to invest the time and resources to understand the process. That’s how the pharmacy management project grew and how future projects will grow.”

For HIP of New Jersey, critical to its relationship with J&J was the corporation’s high public profile and strong name recognition, particularly in New Jersey, and its expertise as a consumer marketer—J&J’s historic skills as a product supplier and provider of logistical services have little relevance to the HIP program.

More to the point, the expanded programs and higher contacts of JJHCS challenge not just J&J’s role as a product company, but also the autonomy and identity of the individual operating companies, many of whom, such as Ethicon, Ortho McNeil, and Janssen, don’t have Johnson & Johnson in their names, by creating a kind of corporate identity. “The one thing that really separates us from our competitors is the J&J name,” says Longstreet. “No matter how you look at it, hospital administrators, doctors, consumers, employers—everyone responds to the reputation we’ve created. A lot of doctors and hospital administrators have told us that if they’re going to have someone play a role as a third party, they want it to be us because of the trust we’ve built up over the years.”

Creating a J&J Brand

Indeed, Longstreet notes, JJHCS often leads with the Health Care Systems identity prior to establishing any contractual relationship with customers on behalf of individual companies, particularly where services are concerned. “In areas like women’s health and down the road, senior care and pediatrics and disease management in GI and diabetes, we’ll be establishing the Johnson & Johnson Health Care Systems name as an overall brand identity rather than leading with Ortho Biotech or Janssen. Customers want to hear how we can help them manage the delivery of care more efficiently. They don’t want us only talking about how much product we’re going to sell them.”

If JJHCS’ higher reach and service focus sometimes elevates relationships with these new customers above the level of products, creating a potential J&J brand, the individual operating companies don’t seem particularly threatened. “To a lot of the new customers, the Johnson & Johnson name hasreal appeal,” says JJPI’s Grilli. “To my core customer, the only important issue is the product. Whether Janssen is part of the J&J family or whether he’s aware of it isn’t a factor in whether he selects our product or not.”

Still, the growing appeal of a corporate J&J brand, relative to the operating companies’ individual brands, reflects the market’s evolution toward managed care and a new kind of customer. The kind of logistical services offered by Hospital Services a decade ago simply aren’t enough to address the needs of these customers. What JJHCS has done is to define a region beyond supply-chain management, perhaps best called clinical-systems management, which embraces both supply-chain issues and the more clinically-oriented needs of managed care customers. If the 1980s saw high-tech suppliers suddenly having to acknowledge issues like distribution which they never believed particularly important, the next century will see them wrestling with issues, most notably the provision of services, that in the past seemed not unimportant but outside their purview.

The challenge for product suppliers: to take a more active role in areas such as clinical management or else see their role in the clinical episode of care, the new surrogate for the supply chain, diminished significantly.

Selling Products Across the Continuum of Care

The issue of JJHCS’ relevance for more traditional customers remains valid, as do related issues of insularity and whether some operating companies benefit more than others. If JJHCS serves none but a select group of internal and external customers, it will have done little but reframe the earlier issues of relevance that J&J wrestled with in the mid-1980s.

Still, as the market evolves toward a more consolidated marketplace, driven by the incentives of managed care, JJHCS addresses the needs of customers who are not just bigger, but fundamentally different than customers in the past. Indeed, the consolidated contracting and radical shift in pricing authority of JJHCS will increasingly be driven not by the customers’ desire to leverage better prices through traditional volume-driven discounts, but by key customers’ awareness that the various components of health care are fundamentally linked.

This broader, integrated clinical vision of MCOs and integrated delivery systems, which link inpatient and outpatient, diagnosis and therapy, makes the autonomy of the J&J operating companies less relevant—even the most successful J&J operating company is, by itself, simply too narrow for the new customer. More to the point, it suggests that one of J&J’s advantages is not just that it sells a lot of products, but that it sells products across the full continuum of care, from diagnostics to therapeutics to wellness and prevention, from low-tech hospital supplies to high-tech devices and biotech drugs. Other large multi-divisional corporations may sell as great a volume of supplies, but few sell as broad a range.

In the 1970s and ’80s, one of AHSC’s great advantages was that it supplied 80% of the products used in the hospital, thus affirming its central role as a supplier. But that was in a hospital-centric health care delivery system. In the 1990s, as managed care broadens the definition of the episode of care, even a company as diverse as Baxter no longer has anything like a full product offering, especially after divesting its diagnostics and Caremark services/PBM businesses. If AHSC/Baxter defined the model supply company of the 1980s, J&J, with its wide product reach, may define the model of the next decade.

Even as it wrestles with the demands of this new kind of customer, JJHCS must continue to prove itself. “I wouldn’t be telling you the whole truth if I told you everyone [at the operating companies] completely embraces everything we do,” he goes on. “We still have to coax and prove ourselves, and we did a lot of that this past year. But we’ve begun to get enough wind in our sails so that the company presidents are coming to us; we’re not just going to them. There’s still a fierce independence around the value of the technology. JJIS knows the interventional cardiologist and doesn’t want to lose that asset, which is an important source of innovative products. But we don’t mind. In the long run, we know J& J’s success is going to come both from having the most innovative proprietary products in the marketplace and a more effective way to get those products to the customer.”

The Operating Companies’ Perspective

The knock on Hospital Services wasn’t that it wasn’t effective at what it did, but that it wasn’t relevant for most of the J&J device and pharmaceutical businesses. By contrast, JJHCS is designed specifically with J&J’s most high tech companies in mind. Indeed, Dennis Longstreet insists that even high flying Johnson & Johnson Interventional Systems, whose cardiovascular stent is has proven extraordinarily successful, is a candidate for JJHCS’ help. “First, they know there’s going to be competition coming,” he says. Moreover, as JJIS itself expands into new areas—witness the recent acquisition of Cordis—it will be able to help customers do things, such as manage the cath lab, that JJHCS was created for.

In truth, a company like JJIS might still be several years away from needing JJHCS. But it is other J&J companies, producers of surgeon-preferred devices, such as orthopedic implant supplier JJPI, and biotech company, Ortho Biotech, who may be the best test of how relevant JJHCS can be to exactly the kind of operating company who found Hospital Services irrelevant.

For JJPI, formed through the merger of J&J Orthopedic and Codman Shurtleff, its specialty surgical instrument business, the recent push toward contracting in orthopedic implants has added a sudden urgency to JJHCS’ role. “Historically, national contracting hasn’t been relevant to us because of the strong role of the orthopedic surgeon in product selection and the importance of sales reps’ personal relationships,” says Don Grilli, JJPI President. “While most other specialties were doing contracing, orthopedics wasn’t.”

Indeed, while 80% of Codman’s instruments are sold under group contract, only about 20% of JJPI’s orthopedic implants are. But that’s growing rapidly, notes Grilli, leaving JJPI, like other orthopedic companies, struggling to develop contracting programs quickly. “Orthopedic surgeons understand that they can’t use five or six brands anymore, that they have to get that down to two or three, and they’re willing to do that,” says Grilli. “But they want to be shown how. It’s a whole new ball game, and working with surgeons and [hospital] CEOs on standardization programs is critical.”

With less than 10% market share, JJPI has, says Grilli, aggressive plans to increase share in what he called a consolidating marketplace. What JJHCS brings JJPI, he says, is both a professional contracting arm and, perhaps even more importantly, access to senior executives at national groups. “They have the contact with the high level people that we need and that we don’t have on our own,” he says. “They get us an entry.”

Indeed, representing not just JJPI, but all of the operating companies, “They’re in accounts I’m not in and can make us aware of opportunities available,” he says. Thus access creates competitive advantage as well as stronger contracts. When Columbia/HCA told JJPI recently not even to bid on its instrumentation contract because they felt Codman didn’t have the right product mix, JJHCS helped open the door for JJPI, eventually resulting in a sole-source supply agreement.

Ortho Biotech faces a similar situation: though one doesn’t necessarily think of biotech drugs as a natural candidate for GPO agreements, 66% of Ortho’s business is on contract because the product is sold largely to hospitals and institutions.

Yet like many biotech companies, Ortho took its time developing group contracts, something Carol Webb, Ortho’s president is eager to redress. “We were leaving a lot of money on the table,” she says. “JJHCS was essential in getting us into a lot of groups.” It’s not that OrthoBiotech didn’t try, says Webb. “But when we’d go in as a single company, we didn’t have the leverage that we got when we went in as part of J&J.”

More important, she says, this coordinated approach “is what our customers want. That JJHCS meets our objectives is less important than that it meets theirs,”

The coordinated contracting of JJHCS is a dramatic step for companies like JJPI and Ortho Biotech, who don’t like to cede pricing authority to anyone. “At first it isscary to give pricing authority to someone else,” says Webb. “But there’s a pricing matrix in place and rules that JJHCS has to follow. If they go outside the matrix, they have to come back to us.” The biggest challenge: making sure the operating companies give JJHCS a reasonable matrix. “But that’s all part of the learning curve,” says Grilli, who adds, “1995 was a big year. It wasn’t so much the concept was in doubt. But we’ve historically operated in a very decentralized way. In today’s marketplace, we, as operating companies, must learn to cooperate.”

Indeed, two years ago, J&J’s pharmaceutical/biotech companies came together in a pilot program, called “Little JJHCS,” to test the benefits of a more coordinated approach to contracting. Working for 8 months at a number of key accounts, the program proved successful in increasing access, driving more sales, and even keeping prices up. Indeed, operating company presidents like Webb and Grilli argue that JJHCS does a lot more than just discounted contracting. “If this business ever comes down to a pure pricing game, I won’t need JJHCS,” says Grilli.

In addition to access or contracting expertise, JJHCS also helps JJPI with service programs designed to address customer needs. Thus, Ortho Biotech is working with JJHCS partner Value Health to develop guidelines for the use of ProCritfor customers, while JJPI is working on a clinical outcomes data base program for orthopedic surgeons. “Most surgeons are just learning how to market themselves to MCOs,” he says. “They don’t know their average length of stay or have the data to determine it. We’ve developed a software package that allows them to create a proflie of their practices so they can compare themselves to others in the marketplace.”

Still, the question is, do companies like JJPI and Ortho Biotech, accustomed to succeeding on the features and benefits of their products, really get anything from JJHCS. Yes, says Webb. “If we weren’t benefiting from this, I would pull out of this as quickly as I could. No operating company is going to accept a loss just to make JJHCS work,” she adds. “What counts at the end of the year is whether I’ve made my numbers.”

Beyond Products: JJHCS and HIP of NJ in Women’s Health

One of the critical features of JJHCS’ expanded capabilities is a health management services arm that develops service programs on behalf of both hospital and non-hospital customers. Far more than the value-added programs that are a staple of product company offerings, JJHCS’ service development is forging new kinds of relationships with customers in areas that often have no direct impact on J&J as a product supplier.

The company’s initiative in women’s health with HIP Health Plan of NJ is a good example. Launched in early 1996, the goal of the program is to develop a health risk assessment tool that HIP will take first to its enrolled members and, later, use to attract new enrollees.

According to Vicki Wicks, HIP’s President and CEO, the program is part of HIP’s efforts “to prove the value proposition to consumers, both HIP enrollees and non-enrollees, that we do make a difference in the health of our members, that those who enroll in our plan really are better off,” she says. “And when we make that claim, I want it to be not just an advertising gimmick or some unsubstantiated claim, but something we can prove.”

Under the program, HIP will mail surveys to approximately 9,000 female members. Information from the surveys will then be analyzed by health professionals who will identify indicators that suggest some kind of intervention might be called for and then contact the woman’s primary care physician. Thus, women of a certain age who report that they haven’t had a mammogram might be contacted to schedule one. In other cases, the intervention might be counselling or education to identify life style changes or family history that puts the patient at risk.

“For the patient, this gives her the opportunity to proactively address any need,” says Wicks. “For the provider, it offers a way to maximize the well-being of the patient, either through an early intervention or some corrective education where lifestyle is concerned—all toward the ultimate goal of proving, in fact, that she’s better off under our care than someone else’s.”

But it’s one thing to create tools to deliver better care at earlier interventions and quite another to rally consumers and make them aware that the program exists. And, notwithstanding help in developing the health risk assessment tool, it was J&J’s considerable skill in consumer marketing and its high profile, particularly among women in New Jersey, that made them a logical partner for HIP.

Indeed, with roots for both organizations in central New Jersey, J&J and HIP have a long and steady relationship, both in governance and as important customers of each other. “Though we’re arguably in different segments of the health care business, our professional objectives and lives have intertwined from Day One,” says Wicks. But she goes on, while that relationship was important, “the development of JJHCS at a time when we perceived the need for some support in differentiating ourselves to a particular portion of the market made them a natural ally. I can’t deny that they have strong identification in this consumer market and that was a big part of their appeal to us.”

Beyond simply serving current members better, HIP hopes to use programs like the women’s health initiative to grow their business. “We’ve been in the health care business in New Jersey for over 20 years,” says Wicks. “And while we’re very good at delivering services to patients, we’re not that good at getting our message out. We do a lot of wonderful things and its frustrating that consumers often don’t know what we’re doing.”

HIP is counting on JJHCS to help them do that. “They know how to get consumers to act,” says Wicks. “They get responsiveness from consumers in a way that we haven’t learned how to do.” Indeed, Wicks notes that a lot of the interventions the assessment tool will identify are already available from HIP; thus the goal of the program isn’t to develop new service offerings, but to create awareness of and access to services HIP already offers. “There’s lots of things we already do for women,” she says. “What we’re talking about in this program is how to get to those women, how to bring them in and have them identify with us, how to retain their loyalty.”

In turn, JJHCS gets in HIP a pilot program to test whether these kinds of services have value—both in serving customer needs and in delivering a return for J&J itself. But beyond customer satisfaction and economic return, the development of these new kinds of services raise intriguing questions for JJHCS. For one thing, how exclusive will such programs be? Traditional value-added services and even most disease management programs are developed on the premise that, if successful, they’ll be offered to a number of customers.

But given the importance of increasing HIP’s market share, the HIP program almost becomes more exclusive, the more successful it is. How, for instance, would HIP feel if J&J used the program as a model to create relationships with other MCOs in New Jersey? “Clearly one of J&J’s objectives is to build a business that generates a return on investment, so it’s unreasonable of us to expect that all of JJHCS’ activities would be exclusive to us,” says Wicks. However, HIP went into the program with the understanding that during this launch period and for some time after, J&JHCS won’t market similar programs to other MCOs. “They may do other programs with [MCOs] in other parts of the country, and we understand that. But if this ever gets to the point that this becomes a commodity, it’s valueless to us.”

Of course, J&J faces the same issue: Wicks acknowledges that HIP has talked to other companies, particularly pharmaceutical companies, about doing similar programs in other disease and therapeutic areas. “Just as we know they’re developing other programs with other MCOs, it’s no secret to them that we have contract relationships with every major pharmaceutical company, and each of them are developing their own programs like this. It’s appropriate for us to hear them, and to the extent that they can contribute on our long term objectives, to work with those companies as well. But I would be sensitive to J&J’s concerns and needs, just as I ask J&J to be sensitive to our concerns about market differentiation.”

Similar issues are raised around the ultimate goal of the program for each company. Vicki Wicks notes that while she understands J&J’s larger need to sell more products through programs such as this, “I’ve got to tell you that if it were a requirement that we buy a quota of products or services, we wouldn’t be in this,” she says. “We’re all mature business people and I understand that we each have market share and profitability goals. But if our relationship in this program doesn’t have stand alone value, if it’s merely a vehicle to sell products, then it isn’t worth it for us.”

But aside from direct quid pro quosfor product services, drawing lines between direct product tie-ins and the benefits of enhanced relationships can be tricky. Wicks acknowledges that there have been discussions between JJHCS and HIP about the status of J&J products on HIP’s formulary, a topic that has nothing to do with the women’s health program but is framed by the broader relationship HIP and J&J have created.”It’s a sensitive area,” she says. “We can’t ignore the fact that we have other relationships with them. It can’t be a quid pro quo, but we also have to recognize that we’re both in multiple businesses and have different kinds of relationships with each other. You can’t be an adversary in one and expect to have open cooperation in another.”

Indeed, here, too, HIP faces the same issue from the other side: if J&J were tomorrow to pull its insurance coverage from HIP, it would have an impact on the kind of relationship JJHCS is building with the women’s health program.”It’s the same on both sides,” she says. “We’d have to question why they did that and then it’s a matter of weighing the value of this individual program in terms of our larger objectives.”