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Do you know what the vertical integration model is in health systems?

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By:Diana González-Bravo
MD, Epidemiólogo
Investigador MBE
Neuroeconomix

Vertical integration is a process in which two schemes or links are integrated in the value chain, in a single company. Applying this concept to the health sector, this refers to the governance structure designed to coordinate and control the care services in different states of the value chain, as well as to facilitate collaboration and communication between service providers.

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This process can bring important gains in terms of efficiency, by reducing transaction costs and a more effective price negotiation process to obtain significant discounts (Bardey D, Buitrago G. Vertical integration in the Colombian health sector. Development and Society, 231-262, ISSN 0120-3584 E-ISSN 1900-7760, 2016)

 

In other words, for Colombian context, vertical integration means that health providers (EPS) provide services directly, through their own service centers or service networks, called Lending Institutions. Health (IPS), which makes the decisions that are made within the scheme between making and buying, producing the necessary inputs or acquiring them in the market through some type of transaction and distributing the products to the consumer or doing so through other companies, are taken centrally. (Restrepo, Jairo Humberto, Lopera, John Fernando, & Rodriguez, Sandra Milena, Vertical integration in the Colombian health system, Journal of Institutional Economics, 9 (17), 279-308, 2007).

 

Why vertical integration?

 

Vertical integration is mainly motivated by three reasons:

 

1) Strategic considerations and transaction costs, in which the direct costs of negotiating and drafting service contracts, compliance monitoring and investment efficiency are centralized in a single head

 

2) The advantages in the price of the product and of the inputs, with which the resources are allocated efficiently and the prices of products, supplies and services are reduced

 

3) The uncertainty of prices or costs in the supply of inputs

 

 

 

What are the advantages and disadvantages of this model?

 

Probably, the main advantage in the integration model is the reduction of conflicts between EPS and IPS, which translates into lower supervision and transaction costs; therefore, the economic impact is lower and increases the possibility of containing medical expenses and obtaining the best possible results in quality health production.

 

Another important advantage that experts point out is that vertical integration not only allows companies to obtain inputs at lower costs when they produce them, but also when they need a service external to their capabilities and buy it from another company within the same consortium, Their expectations are symmetrical, given that the production processes and their costs are known internally.

 

On the other hand, the negative aspect that is most discussed is mainly the limitation of competition, which can occur, for example, when exclusive contracts are signed between insurers and providers.

 

Restrepo and colleagues raise this vision of advantages and disadvantages of the vertical integration model in the Colombian health system, which is shown below:

 

Adapted from: Restrepo, Jairo Humberto, Lopera, John Fernando, & Rodríguez, Sandra Milena. La integración vertical en el sistema de salud colombiano. Revista de Economía Institucional. 9(17), 279-308. 2007. Búsqueda online Junio 13, 2018, disponible en: http://www.scielo.org.co/scielo.php?script=sci_arttext&pid=S0124-59962007000200011&lng=en&tlng=es

 

Vertical integration in the health sector is a victim of political passions and the actors in the sector, with arguments for or against. The negotiation of prices, the control of processes and the obtaining of services and treatments in health at better costs, optimizing the resources of the health system, constitute the main advantage of vertical integration in the Colombian health sector. However, there are threats in terms of free competition and transparency that can not be ignored.

 

Efforts have been made to execute the vertical integration model in the subsidized regime in order to achieve system integration and optimize resources.

References

Restrepo, Jairo Humberto, Lopera, John Fernando, & Rodríguez, Sandra Milena. La integración vertical en el sistema de salud colombiano. Revista de Economía Institucional. 9(17), 279-308. 2007. Búsqueda online Junio 13, 2018, disponible en: http://www.scielo.org.co/scielo.php?script=sci_arttext&pid=S0124-59962007000200011&lng=en&tlng=es

Bardey D, Buitrago G. Integración vertical en el sector colombiano de la salud. Revista Desarrollo y Sociedad. 231-262, ISSN 0120-3584 E-ISSN 1900-7760. 2016

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