Compare advantages and disadvantages of the vertical integration of the hospital

Question

Compare advantages and disadvantages of the vertical integration of the hospital and physicians’ practice, including economic factors that should be considered. Then, recommend strategies for the organizational integration of the hospital and practice. Defend or argue your recommendations using economic principles. Compare advantages and disadvantages of the vertical integration of the hospital and physicians’ practice, including economic factors that should be considered. Then, recommend strategies for the organizational integration of the hospital and practice. Defend or argue your recommendations using economic principles.

Explanation / Answer

Advantages:

Lower transaction costs: As would be the expected implication of transaction costs theory on any industry, the vertical integration of the hospital and physicians’ practice will also lead to lower costs and higher efficiency due to better integeration. Managed care is one of the many big reasons why such integrations can help in overcoming the agency problem and adding to the economies of scope, thus reducing the overall costs and increase competetiveness. Data pooling from both hospitals and physicians can laed to better service and care to the patients

Increased barganning power: Such relationships will increase the barganning power of the hospitals by decreasing competetion. The power of bargaging will increase against insurers (suppliers) when hospitals and physicians acts as one unit. This also helps in fighting competetion from managed care facilities by offering better care to patients through integrated efforts

Aliging interest to reduce costs: The effect of synergy can be seen in this case too. For example: the care and facilities like bed days, number of tests etc that a patient requires depends on the physicians advise. In case of unintegrated sytem the physiscian will not have any marginal costs associated with these services taht hospital offers and may use it recklessly. But in case of a integrated system, costs can be reduced by aliging the interest of the 2 parties

Advantages of group culture: Group culture can be introduced in a interagetd system. This can help to reduce costs by introducing integrated finances, peer pressure etc

Disadvantge:

Trouble and costs associated with integration: the benefits will accrue only when the hospital and physicians are compatible and able to overcome initial increase in administrative and other costs like data integration etc that are associated with such integrations

Creating monoplolies: In case of highly specialised areas, such integerations may lead to creation of monopoly and hence the pricing power of the hospitals and physicians will increase at the costs of the customer. This can breach the benefits of free markets

Although, the overall effectiveness of integration will depend on case to case basis. Most of the studies have found that the disadvantages often overrun the advantages in such integrations

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