Firms can adopt vertical integration as a strategy when they want to improve their competitiveness. Specifically, vertical integration is a business strategy that organizations use to expand their operations and efficiencies. Vertical integration involves coordination or a combination of different stages of production. Thus, they can be attained through this model through contracts, ownerships, and relationships (Bauer, 2015). For years, the benefits of a vertical expansion have been fostered by private commissions as well as the federal government. This paper will examine the actual outcomes as well as benefits of a vertical integration in the healthcare sector.
There are market imperfections in the health care that include asymmetrical information, high third party payments and insurance. Consequently, consumers of care, lack pertinent knowledge, thus have difficulty in determining quality. More so, clinical decisions are made by a fragmented, disjointed system. For this reason, the health care today resembles other industries by adopting managerial tools and techniques. To be specific, hospitals are adopting structures, such as the matrix management, total quality management, re-engineering and management by objectives (Walston, 2014). Arguably, one can say that it is an effort to become efficient and compete effectively in the market. Vertical integration is among the approaches the health care is adapting to make strategic alliances.
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The interest in having a Vertical integration is to attempt to adapt to the increasing pressures from insurers, employees and also to control the costs of care. In this regard, it is essential to experiment with a variety of mechanisms to integrate, better coordinate and restructure the health care system to ensure better provision of services. It is apparent that vertically integrated structures are now seen as the solution to a wide range of problems in the health industry. The benefits of using such a structure are the economies of scale, reduced duplication of work, efficient care, increased market influence and also having better coordination services. The health care providers anticipate to having a rise in their ability to prosper and survive (Bauer, 2015). Equally, the businesses and the society anticipate the higher quality of care at lower costs.
According to Watson (2014), research on vertical integration shows that the strategy promises benefits for the healthcare system. The major benefit is the efficiencies of both administrative and clinical environmental acceptance and increased market power. Many scholars have the assumption that vertical integration improves the health status (Watson, 2014). The expansion comes with the creation of improved marketplace efficiencies as the system can reduce excess capacity, concentrate on responsibilities for a single continuum of care and more so eliminate unnecessary care.
The strategy increases the market power as it forestalls physician competition. It also increases the power to negotiate with managed care companies, suppliers, and others. More so it facilities market domination when an organization gains support and legitimacy by meeting external expectations and norms (Shi & Singh, 2012). Even though health care managers have varied reasons for pursuing integration, the industry is still transforming into new models of vertical expansion. They attempt to reconfigure their organization in such a way that it will emulate past models that have been successful. Conversely, new laws for reforming the health care are another stimulus for reconfiguration. For instance, the Minnesota Health Law specifically requests the healthcare providers to form integrated service networks (Walston, 2014). They have to use vertically integrated systems to offer capacitated care to be a complete health care provider (Walston, 2014). As a result, such laws have led to massive realignments of healthcare providers resulting in proliferated integrated structures. In the realm of federal or state reform, many care systems are following the anticipated legitimized form of integrated expansion.
The hospital would need information technology integration. The institution recognizes that health information is primary to care as it involves the management of people’s health information. A successful health care institution has to use information technologies that would reduce costs, improve care and offer patient-centered care (Shi & Singh, 2012). In this case, the approach has to be coordinated into the system as the impact of new technologies might improve health care. The two partners have to commit to fixing the manner the care is delivered. The basic principles of cost-effective planning have to apply.
In conclusion, it is important for healthcare researchers as well as practitioners to learn and acknowledge the experiences of vertical integration by other industries. The unprecedented circumstances in the health care marketplace are compelling the system and hospitals to explore partnerships to remain relevant in the market. Vertically integrated networks have to formulate their operating principles to prevent the anticompetitive outcomes in the market. Specifically, they have to agree to come together and implement a change in the sector.
- Bauer, J.C. (2015). Paradox and imperatives in health care: Redirecting reform for efficiency and effectiveness (3rd ed.). New York, NY: CRC Press.
- Shi, L., & Singh, D. A. (2012). Delivering health care in America: A Systems approach. Sudbury, Mass: Jones & Bartlett Learning.
- Walston, S. L. (2014). Strategic health care management: Planning and execution (1st ed.). Chicago, IL: Health Administration Press.