The concept of vertical integration in business is not new, where various attempt to acquire various elements of their supply chain and/or distribution network to increase the effectiveness of their operations and reduce costs. In that regard, the transfer of such a concept into health care is not a unique phenomenon, with health care largely following the model of business transaction between insurance providers and hospitals. Nevertheless, certain aspects might lead to questioning the effectiveness of such integration in a health care context. In such context, vertical integration implies the formation of a strategic relationship between hospitals and physicians as a response to the rapidly expanding managed care health insurance. In that regard, this paper will attempt to examine two physician-hospital integration arrangements, based on the article “Strategic Integration of Hospitals and Physicians” (2002) by Cuellar and Gertler.
The first arrangement that should be paid attention to is Open Physician Organizations (OPOs), which can be defined as centralized joint ventures between hospitals and physicians. In such joint ventures, the hospital provides administrative services to the physicians and manages ambulatory care facilities in which physicians work (Cuellar & Gertler, 2006, p. 9). The autonomy of both physicians and hospitals is retained within such a form of vertical integration arrangement.
The second form of arrangement can be seen through Fully Integrated Organizations (FIOs), the closest resemblance to which can be seen through medical foundait0ons and salary models. In such arrangements, the hospital hires physicians as hired employees, purchasing assets, both physical and intangible. Such arrangement has the greatest potential for coordination and efficiency, being classified as the highest form of integration. Nevertheless, the challenges expected can be seen through the relationship of the performance to salary (Cuellar & Gertler, 2006, p. 10).
Analyzing both arrangements, it can be stated that in terms of efficiency, there are no statistical differences in all types of integrated organizations. In that regard, it can be stated that there are no gains in efficiency for health care organizations. The efficiency was analyzed based on analyzing the costs per patient day and costs per patient discharged. In terms of prices and volumes, OPHOs might have higher prices and volumes from the non-integrated hospital, which can be explained through the market power theory. The integrated hospital has more bargaining power as the barriers for entry for an integrated hospital are higher than for physicians and hospital alone.
As integrated hospitals form exclusive relationships, the entrance to such network will be more difficult, which results in bargaining power, and accordingly higher prices and volumes. FIOs were excluded from the analysis as their prices might not reflect a market price, although FIOs appear to charge the same price.
The quality variable was more important in such aspect, in which integrated hospitals were expected to be better, due to improved coordination, which in turn results from an institutional setting for coordination. FIOs, in that regard, provide better quality, which accompanies by the absence of price increase make them different from other integrated organizations. With no efficiency gains differences and highest quality improvements in FIOs, it can be stated that they are formed in response to other factors.
It can be concluded that integrating hospitals is not as effective as it is promoted to be by public policies. Higher cost and no differences in efficiency indeed indicate that the integration is formed due to managed care to increase market and bargaining power. The exception can be seen in FIOs which integration purposes are not explained as they provided comparatively higher quality services with prices comparable within non-integrated hospitals.
Cuellar, A. E., & Gertler, P. J. (2006). Strategic integration of hospitals and physicians. Journal of Health Economics, 25(1), 1-28.