Managed care and vertical integration: implications for the hospital industry

Efforts to control health care costs are encouraging vertical integration in the health services industry. This restructuring is uniting the financing and delivery of health services into one organizational structure. Current trends in health insurance suggest that the principal insurance products of vertically integrated systems will be carefully managed to reduce unnecessary utilization. As integrated health systems come to dominate the markets of health insurance and medical services, the hospital industry will be dramatically affected. Hospitals will be the principal cost centers while insurance products will be the principal sources of revenue in integrated systems. Accordingly, management will face incentives to minimize hospital utilization and sell or convert excess hospital assets. This article discusses specific changes that hospitals may face if current trends continue.