Vertical integration and organizational networks in health care.

This paper documents the growing linkages between primary care-centered medical groups and specialists and between physicians and hospitals under managed care. We evaluate the two alternative forms of organizational coordination: "vertical integration," based on unified ownership, and "virtual integration," based on contractual networks. Excess capacity and the need for investment capital are major short-term determinants of these vertical versus virtual integration decisions in health care. In the longer term, the principal determinants are economies of scale, risk-bearing ability, transaction costs, and the capacity for innovation in methods of managing care.