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What do we know about vertical integration in health?
Who, how and what effects have vertical integration processes had in health?

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Giancarlo romano
Health Economics Director
NeuroEconomix

In this post of our blog we take a look at the concept of vertical integration (IV) between companies dedicated to the production of health services and we review what studies in the country tell us about the subject. In other words, we will discuss what is vertical integration in health in Colombia.

What is vertical integration?

One of the least studied areas, and one of the most fascinating, of the health sector in Colombia is the structure of the production chains and the creation of value of health services and how they respond to the problems of efficiency and quality with which they are produced. health services. It is important to understand that these health production chains are the result not only of the formal rules of the game that constitute them, but also of the interactions and dynamics, formal and informal, of the different agents that intervene in them. Within this general framework, the way in which the vertical chains of health production are organized play a central role, of which and what type of companies are integrated with each other, with what motivations and purposes, and with what results for both companies and companies. for the efficiency and quality of the production of health services and, ultimately, on the results in the health of the population. In general terms, vertical integration occurs when a company controls, directly or indirectly, different stages of the production chain and is associated with decisions of (Figure 1):

 

  • Backward vertical integration (downstream/backward integration): produce the inputs necessary for production or purchase them on the market. For example, an auto company may control a tire company, a glass company, and a metal company.
  • Forward integration (upstream / forward integration): distribute the products directly or through other specialized firms. For example, an automobile company may control dealerships that sell the cars it produces.

integracion1

 

There are good reasons why companies would like to vertically integrate:

 

 

integracion2

 

As can be seen, the motives and incentives of companies to vertically integrate can be commendable or condemnable and, in the same way, their effects on competition in markets, the functioning of production chains and the well-being of final consumers.

 

For its part, the production of health services has particularities that complicate the study of both the characteristics of how vertical integration processes are carried out and the impacts they have on the production of health services. At least five classes of agents can be identified in the production chain (1,2):

 

  • Consumers, who use services and alternate between service providers, specialties, care settings and change between stages of their health-disease cycle.
  • First-line providers, with whom the consumer comes in direct contact to meet their health needs.
  • Second-line providers, who are consulted by patients by referral of the above and provide the services agreed with those responsible for financing
  • Insurers or risk buyers.
  • Governments, which regulate or finance health care.

 

Vertical integration takes place between first and second line providers and insurers. In the Colombian case, first-line providers and insurers are usually integrated into Health Promoting Companies (EPS) and second-line providers are generally Health Providers Institutions (IPS). Within the EPS and IPS, the doctor plays a crucial role since it determines an important part of the activity flows (what is done) and the monetary flows associated with them, although, usually, they do not have the power to make decisions associated with the control or ownership structure of these agents or when, how, with whom or for what purposes they are integrated. In the production of health services, unlike what occurs in manufacturing sectors and current private services, integration is not only due to technical requirements, but also to the generation of financial flows to pay for services to the extent that insurance and The provision of services are separated and to that extent that health production takes place in two production chains, which can run separately and generate different products, insurance and medical benefits, and which, despite this, are it needs the first for the second to exist to produce health. Thus, it is often not very clear which is the output, which are the inputs and which are the distribution channels to define the direction of integration between insurance and services.

 

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The institutional design of health production and vertical integration in Colombia

Within the structured pluralism on which Law 100/1993 is based, the institutional design of the production of health services in the country establishes that insurance is the main mechanism of universal access to health services, the EPS are in charge of manage health risks, insurance and service provision are separated so that each of these functions is developed under competitive conditions and resources flow from insurance to provision through negotiation mechanisms that seek service providers that guarantee the lowest cost. From this perspective, it seems that the EPS are not allowed to set up their own networks for the provision of health services and IPS, since with vertical integration the capacity of the system for competition was broken. Thus, if EPS were allowed to create their own network of service providers, they could not provide a good service to the extent that there is no competition, since an EPS integrated with a hospital would not want to contract with another hospital and, if it does does, it could pay you at a lower price than what you would pay without vertical integration, negatively affecting the latter. However, Law 100/1993 allowed the EPS to develop their own networks, to the extent that in health production there are potential economies of scale that can translate into production efficiencies and, in this way, in cheaper and better services. better quality. Furthermore, in the Colombian context, the competition between EPS is not carried out via prices, that is, via premiums since they receive units by capitation (UPC) adjusted to the risks paid by the State. This is, broadly speaking, the institutional framework of the health sector in Colombia and how vertical integration plays within this framework, but ...

 

What have been the effects of IV on health production in Colombia?

As far as we know, in Colombia there are no rigorous empirical studies on how vertical integration processes have taken place in the health sector, what their effects have been both on the structure of health production chains and on their operation and capacity to create value; Even less do we know what effects all this has had on the performance of the sector or on the health of the population, despite the fact that as a general rule it is publicly known which IPS and providers are part of which networks of which EPS, either through control of property or contractual relationships. Nonetheless, we can formulate informed and reasonable guesses that hopefully serve as an incentive for formal and rigorous research in the area. One consequence of the economies of scale and efficiency gains that vertical integration strategies can achieve is that they do not generate a direct advantage through lower costs that will allow EPS to charge lower premiums and, therefore, gain market shares. Thus, in principle, competition between EPS should take place through quality of service, at least theoretically. However, it does not appear that there have been gains in efficiency and in the quality of the provision of health services, so that if vertical integration had generated efficiency gains, these would probably have been converted into income for the EPS (3). On the other hand, the natural counterpart of economies of scale is the concentration in few agents in the market that results from it. Thus, potential market losses were apparently generated for many providers, people's freedom of choice was limited and the quality of service did not necessarily improve, insofar as vertical integration was mainly motivated by cost containment. The consequences of this did not wait, in 2007 Law 1122 was enacted, which limited EPS not to contract more than 30% of the value of health spending directly or through third parties, with their own IPS and in the regime Once the EPSs subsidized at least 60% of their expenses, they must do so with hospitals belonging to the public network, which in itself constitutes another limit to vertical integration. Others seem to be the conclusions of Bardey and Buitrago (3):

 

«[…] In the large urban centers of Colombia, the conditions do not seem to exist for vertical integration to cause the distortions of competition that occur in other contexts. In this context, vertical integration can then improve efficiency without compromising competition. In the rural areas of Colombia, on the contrary, the low competition in these markets constitutes a favorable terrain for the vertical integration between EPS and IPS to result in foreclosure behaviors. In this case, the recommendation would be the other way around, that is, to prohibit vertical integration a priori. " (p. 257).

 

In any case, the truth is that our appraisals and those of any analyst are nothing more than hypotheses that are well worth exploring. However, this requires information and open and unlimited access to it by researchers. Perhaps a first and foremost work is the necessary production of information that is required for an adequate understanding of what IV is and the impacts that IV has on the health sector. We would like to see young researchers who get their hands on a problem that is not only interesting, but also capable of personal intellectual retribution and for the benefit of the country.

References

1. Restrepo J, Lopera J, Rodríguez S. Vertical integration in the Colombian health system. Rev Econ Inst [Internet]. 2007 Dec 13 [cited 2019 Mar 7]; 9 (17). Available at: https://revistas.uexternado.edu.co/index.php/ecoins/article/view/10

2. Chestnut Yepes RA. Vertical integration between health promoting companies and health service providers. Rev Gerenc Health Policies. 2004; 3 (6): 35-51.

3. Bardey D, Buitrago G. Vertical integration in the Colombian health sector. Rev Desarro Soc. 2016 Jul; (77): 231-62.

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