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

In the United States, many healthcare organizations are being transformed i nto large integrated delivery systems, even though currently available empi rical evidence does not provide strong or unequivocal support for or agains t vertical integration. Unfortunately, the manager cannot delay organizatio nal changes until further research has been completed, especially when furt her research is not likely to reveal a single, correct solution for the div erse healthcare systems in existence. Managers must therefore carefully evaluate the expected effects of integrat ion on their individual organizations. Vertical integration may be appropri ate if conditions facing the healthcare organization provide opportunities for efficiency gains through reorganization strategies. Managers must consi der (I) how changes in the healthcare market have affected the dynamics of production efficiency and transaction costs; (2) the likelihood that integr ation strategies will achieve increases in efficiency or reductions in tran saction costs; and (3) how vertical integration will affect other costs, an d whether the benefits gained will outweigh additional costs and efficiency losses. This article presents reimbursement systems as an example of how r ecent changes in the industry may have changed the dynamics and efficiency of production. Evaluation of the effects of vertical integration should all ow for reasonable adjustment time, but obviously unsuccessful strategies sh ould not be followed or maintained.