Friday, April 2, 2010

Hospital Innovation

The Financial Times has an interesting article looking at how hospital innovation can lower cost and increase quality in the health care market.

The article mentions a number o f interesting innovations from complete electronic medical records, to the ability of patients to schedule their own appointments, to salaried physicians and bundled procedures. Almost missed by me was a short statement that the hospital also runs its own insurance company, and this has huge economic implications. I have written about vertical integration before, but I think that the idea is worth repeating. So here's the basic idea of how vertical integration can reduce prices to patients, increase the amount of care and increase the profitability of upstream and downstream health care providers - which I believe are all worthy goals.

In economic terminology, the hospital is the downstream firm and insurer is the upstream firm, where being upstream is farther away from the final customer - the patient. If hospital is the downstream firm and health insurance provider is the upstream firm, and health insurance provider "sells" its services to hospital, the two firms remaining separate will lead to profits for each firm, with some final price to the patient and a number of health procedures produced. But here is the interesting thing, if you allow these two firms to merge, it is possible for the overall number of health care procedures produced to increase, the final price of health services to decrease and the combined profits for the two merged firms to increase. In other words, this is a win-win strategy for both the consumers and producers of health care. And in class I will go through how this works.

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