Vertical Integration in Healthcare

Our team is currently part of an international project looking at the impact of vertical integration on healthcare expenditure, patient outcomes and competition between providers. The project is implemented together with colleagues from the University of Brno and the Düsseldorf Institute for Competition Economics. It has received funding from the German Science Foundation and is implemented in cooperation with the Ministry of Health in Slovakia.

The project in a nutshell: The goal of the project is to evaluate the potential for insurer-provider integration to improve the efficiency in the context of a universal healthcare system with limited price mechanisms. It investigates how common ownership of insurance companies and physicians affects patient-level costs and outcomes, as well as competition between specialists. In doing so, it aims to contribute to the current policy debate regarding the welfare impact of vertical integration on healthcare markets.

The first part of the project is concerned with efficiency aims to evaluate whether patients who visit vertically-integrated providers incur lower costs than they would in the context of independent provision of primary and secondary care. It seeks to determine to what an extent the costs incurred by vertically integrated providers diminish through changes in the utilization of healthcare at the extensive margin (i.e. through a decrease in the volume of physician visits) or at the intensive margin (i.e. through a reduction in the costs per visit). It also investigates substitution patterns in healthcare utilization across different tiers of the system (primary, secondary and tertiary care).

The second part of the project shifts the focus to the competitive effects of vertical integration. In particular, it focuses on how physician referral behavior is influenced by vertical integration. It seeks to evaluate how characteristics such as distance, quality and price influence the joint decision of gatekeeper general practitioners and patients on which provider to visit in order to fulfill a referral and whether common ownership relationships between primary and secondary care providers influence patient flows. We expect that patients visiting integrated general practitioners are less distance sensitive, more sensitive to cost and less sensitive to physician quality. All of these processes would serve as a potential signal for preferential referral processes on behalf of physicians.
The results from this analysis will contribute to the ongoing academic and policy debate regarding the role of vertical integration in fostering efficiency, as well as building market power and potentially implementing foreclosure on the market.