Incomplete vertical integration in the health care industry: pseudomarkets and pseudopolicies

Most economic relationships are either arm's-length exchange transactions, each party seeking his or her own interest, or command structures, such as a firm or public agency, integrating joint efforts toward a common goal. The health care industry, however, displays a pattern of incomplete vertical integration--relationships which are neither truly arm's-length nor completely hierarchical. The doctor-patient relationship is archetypical. Physicians appear to sell services in private markets; yet they reach through the exchange process to direct the consumer-patient's utilization decisions, implicity undertaking to act in the patient's interest, and thus integrate forward. But they also integrate backward to control the public regulatory process--self-government--and some forms of insurance. The health care systems of different countries--Canada, the United Kingdom, and the United States--can be interpreted as different patterns of incomplete integration among five basic classes of transactors: consumer-patients, first-line providers, second-line providers, insurers, and governments. Each system of linkage has characteristic strengths and weaknesses. Nowhere, however, do we find a predominance of arm's-length market relationships. Where they exist, markets in health care are usually pseudomarkets dominated by one side of the transaction. The rhetoric of market relationships serves principally to obscure political struggles over shifting patterns of integration.