Question 1How has the healthcare industry changed (from before 1983 to after 1983)? What are the implications for BD? How did BD manage to gain an 80% market share in this market? Which larger competitors than BD have tried to enter without success? In 1983, the entire healthcare industry was affected by changes made by the US government to how hospitals reimbursed Medicare patients (40% of all hospital stay days). Let's see what the situation was like before and after these changes. Before 1983, hospitals were reimbursed for all costs incurred in serving those patients. Hospitals were rewarded for efficiency. Hospital buyers were specialists, without acquiring skills or interest in negotiating for prices. Distributors were making large profits and not paying enough attention to costs. After 1983 Under the new system, payment to a hospital was based on national and regional costs for each DRG, not on hospital costs. Additionally, national and regional averages needed to be updated, so that if hospitals improved their cost performance, they would be subject to stricter DRG-related payment limits. Hospital admissions fell 4%, the largest drop on record; the average length of a patient's hospital stay fell 5% to 6.7 days, also the largest drop on record. Multi-hospital chains and purchasing groups were formed, with the goal of increasing the hospital's bargaining and purchasing power for equipment and supplies. In 1985, approximately 45 percent of all U.S. hospitals were affiliated with multihospital chains, and it was predicted that 65 percent would be so affiliated by 1990. Individual hospitals belong to different purchasing groups and often switch between groups. to the other. Distributors are pressured to reduce costs to offset lower margins resulting from lower prices. A primary objective for BD in both the tube and needle industries was to maintain a leading market share. BD planned to combat Terumo through accelerated new product development and annual improvements in product quality, while leveraging its strong market share to become the lowest-cost procedure across all product segments. BD's strategy is to force other competitors to follow this aggression on quality, anticipating the increase in costs of all competitors in the market, which would have been easier for BD to manage thanks to the high market share it allowed to BD to amortize the capital investment. BD set up a Z contract, in which prices and order quantities were negotiated directly with hospitals but still delivered via distributors. Z-contract prices with large purchasing groups were often 30-40% lower than list price.