Impact of vertical integration in a referral-based healthcare system

Vertical integration has been growing steadily in healthcare and several studies have explored the impact of this phenomenon on prices, consumers, etc. In this work, motivated by changes in healthcare systems in China, we provide an operational perspective by investigating how vertical integration influences the referral behavior in primary care and the corresponding service provision at hospitals or specialists. We present an optimization model to explore the effect of different levels of vertical integration on generalists and specialists. We find that the healthcare system efficiency can indeed be improved with a moderate level of integration. However, when the level of integration increases beyond a certain threshold, healthcare costs may actually increase with more integration especially when generalists or primary care providers are inadequately trained and specialists are highly utilized. We find that full integration is not optimal. Moreover, aiming for a moderate level of integration is especially appropriate if the generalist’s ability to treat complex patients is limited and/or timely access to treatment is important. Our work also shows that physicians get higher payment without necessarily improving service quality when the integration level is higher. We discuss the implications of our results in the context of the Chinese healthcare system, although some insights may apply more broadly.