Incentives for vertical integration in healthcare: The effect of reimbursement systems

In the United States, many healthcare organizations are being transformed into large integrated delivery systems, even though currently available empirical evidence does not provide strong or unequivocal support for or against vertical integration. Unfortunately, the manager cannot delay organizational changes until further research has been completed, especially when further research is not likely to reveal a single, correct solution for the diverse healthcare systems in existence. Managers must therefore carefully evaluate the expected effects of integration on their individual organizations. Vertical integration may be appropriate if conditions facing the healthcare organization provide opportunities for efficiency gains through reorganization strategies. Managers must consider (1) how changes in the healthcare market have affected the dynamics of production efficiency and transaction costs; (2) the likelihood that integration strategies will achieve increases in efficiency or reductions in transaction costs; and (3) how vertical integration will affect other costs, and whether the benefits gained will outweigh additional costs and efficiency losses. This article presents reimbursement systems as an example of how recent changes in the industry may have changed the dynamics and efficiency of production. Evaluation of the effects of vertical integration should allow for reasonable adjustment time, but obviously unsuccessful strategies should not be followed or maintained.