Vertical Integration and Antitrust in Health Care Markets

• Date: 01 June 1994
• DOI: 10.1177/0003603X9403900202
• Author: Barry C. Harris,Kathryn M. Fenton
• Published date: 01 June 1994
• Subject Matter: Article

The Antitrust Bulletin/Summer 1994

Vertical integration and antitrust

in health care markets

BY KATHRYN M. FENTON* and BARRY C. HARRIS**

333

Among the many changes experienced by the health care industry

in recent years has been increasing vertical integration. Fueled by

adesire for business diversification and prompted by cost contain-

ment initiatives, vertical integration has emerged at all levels of

the industry.' Payors are establishing their own provider networks

*Partner, Jones, Day, Reavis &Pogue, Washington, DC.

** Principal and Senior Vice President, Economists Incorporated,

Washington, DC.

AUTHORS' NOTE: This article has been adapted from a presentation at a

program on Managed Competition and Health Care Reform, at the 68th

Annual Western Economics Association International Conference, Lake

Tahoe, Nevada, on June 23, 1993. The comments

of

the discussants at

that program, Phillip A. Proger, Toby G. Singer and William E. Kovacic

are gratefully appreciated.

Economists have identified some conditions under which contract-

ing between independent firms may be difficult, and thus vertical integra-

©

!994

by Federal Legal Publications, Inc.

334

The antitrust bulletin

and other related organizations. Provider-organized networks are

increasingly common, with providers at different levels of the

delivery

system

integrating

and

otherwise

coordinating

their

efforts. Hospitals and physicians are integrating into the provi-

sion of related medical services, such as home health care and the

supply of durable medical equipment (DME).

These

trends are likely to continue,

particularly

given

the

expected consolidation and cost reductions triggered by proposed

health care reform initiatives. Amajor component of the managed

competition approach advocated by a number of proposals is that

hospitals and physicians will integrate their delivery

of

services

by forming hospital-physician

joint

ventures. Other reform pro-

posals

contemplate additional forms of vertical integration by

providers and insurers to generate efficiencies, reduce costs, and

improve quality in the delivery of health care.

Regardless

of

the

health care reform

measures

ultimately

enacted at the state or federal levels, these trends toward increased

vertical integration are virtually certain to continue. Thus, the

treatment of such conduct under the antitrust laws will assume

even greater importance. Not surprisingly, prior efforts at diversi-

fication

and

vertical

integration in the

health

care

field

have

attracted antitrust scrutiny. Antitrust officials at both the Federal

Trade Commission (FTC) and the Department of Justice (DOJ)

have identified this subject as a focus of ongoing enforcement

tion

may be preferable. One

such

condition

occurs

when

the

parties

have

different

information

about

the

transaction

and

the

cost

to a

party

of

obtaining

additional information is high. Similarly,

differing

views

about

the future or difficulties in identifying

which

of

the

contract's

contingen-

cies

actually

occurred

may also

make

contracting

difficult. It

may

also be

difficult to

execute

a

contract

for transactions

that

involve costly, transac-

tion-specific

investments

in

either

human

or physical

capital.

Because

of

such

contracting

difficulties, many

of

which

exist

in

health

care

markets

that

often

have

incomplete

and

sometimes

ambiguous

information,

some

types

of

transactions are

most

efficiently

handled

within

a

single

firm. A

more

complete

discussion

of

these

concepts

appears

in

OLIVER

E.

WILLIAMSON,

MARKETS

AND

HIERARCHIES:

ANALYSIS

AND

ANTITRUST

IMPLICA-

TIONS

(1975).