Scenario: You are the chief financial officer (CFO) of a hospital located in a highly competitive, urban market split with two competing hospitals. The hospital is considering purchasing or affiliating with a large physicians' practice. Your hospital has 30% market share, but does not currently have any owned/employed physicians. Private insurers and Medicare are aggressively pushing value-based reimbursement under ACO contracts, and the one competing hospital has already acquired a large physicians' practice.
Analyze the provided scenario. What are the advantages and disadvantages of the vertical integration of the hospital and physicians' practice? What economic factors should be considered?
Consider strategies for the organizational integration of the hospital and physicians' practice. Be sure to address the economic factors you identified.
There are several advantages of the vertical integration of the hospital and physicians' practice. The hospital has greater control over the physicians' practice. Currently, your hospital has 30% market share but if it acquires a large physicians' practice, it will get access to 100% of the physicians' practice's patients. This will increase the market share of your hospital. The key advantage is that the vertical integration will provide opportunities for cost control. This is essential for your hospital because private insurers and Medicare are aggressively pushing value based reimbursement under ACO contracts. If there is vertical integration between the hospital and a large physicians' practice, there will be close collaboration, and coordination. This will lead to cost savings. Further, your hospital will gain because the competitor of the hospital has already acquired a large physicians' practice. Your hospital will gain competitive advantage from acquiring the large physicians' practice. In addition, your hospital will get access to more patients and develop a larger network. With close coordination between the physicians' practice and the hospital, your hospital will gain because of increased differentiation. ...
The answer to this problem explains vertical iteration in healthcare. The references related to the answer are also included.