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Integration: the rm and the health care sector Miriam J. Laugesen and George France Health Economics, Policy and Law / Volume 9 / Issue 03 / July 2014, pp 295 - 312 DOI: 10.1017/S1744133114000139, Published online: 23 April 2014

Link to this article: http://journals.cambridge.org/abstract_S1744133114000139 How to cite this article: Miriam J. Laugesen and George France (2014). Integration: the rm and the health care sector. Health Economics, Policy and Law, 9, pp 295-312 doi:10.1017/S1744133114000139 Request Permissions : Click here

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Health Economics, Policy and Law (2014), 9, 295–312 © Cambridge University Press 2014 doi:10.1017/S1744133114000139

Integration: the firm and the health care sector MIRIAM J. LAUGESEN Department of Health Policy and Management, Mailman School of Public Health, Columbia University, USA

GEORGE FRANCE Institute for the Study of Regionalism, Federalism and Self-Government, National Research Council, Italy

Abstract: Integration in health care is a key goal of health reform in United States and England. Yet past efforts in the 1990s to better integrate the delivery system were of limited success. Building on work by Bevan and Janus on delivery integration, this article explores integration through the lens of economic theories of integration. Firms generally integrate to increase efficiency through economies of scale, to improve their market power, and resolve the transaction costs involved with multiple external suppliers. Using the United States and England as laboratories, we apply concepts of economic integration to understand why integration does or does not occur in health care, and whether expectations of integrating different kinds of providers (hospital, primary care) and health and social services are realistic. Current enthusiasm for a more integrated health care system expands the scope of integration to include social services in England, but retains the focus on health care in the United States. We find mixed applicability of economic theories of integration. Economies of scale have not played a significant role in stimulating integration in both countries. Managerial incentives for monopoly or oligopoly may be more compelling in the United States, since hospitals seek higher prices and more leverage over payers. In both countries the concept of transaction costs could explain the success of new payment and budgeting methods, since health care integration ultimately requires resolving transaction costs across different delivery organizations. Received 15 January 2013; revised 2 March 2014; accepted 3 March 2014; first published online 23 April 2014

Introduction A fragmented health care system results in lower quality care due to reduced care coordination (Bodenheimer, 2008). In the United States, 27% of patients *Correspondence to: Miriam J. Laugesen, Assistant Professor of Health Policy and Management, Mailman School of Public Health, Columbia University, 600 W. 168th St, MSPH Box 14, New York, NY 10032, USA. Email: [email protected]

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reported that their test results or records were not available at their appointment time or that duplicate tests were ordered; however, just 13% of patients in the United Kingdom experience this problem (Table 1) (Schoen et al., 2011). Thus, integration is a key goal of health reform in the United States and England despite the fact that this concept has various meanings and seems ephemeral. Memories appear short, since integration was the preoccupation in the 1990s in both countries and across all health care systems. Past efforts have had limited success: one estimate of the level of integration suggests that there are just a handful of organizations in the United States that qualify unambiguously as an integrated health care delivery system and that there are none at all in England (Bevan and Janus, 2011); another study of England suggests the prevalence of integrated care organizations is over-blown, since the same few ‘boutique pilots’ are mentioned repeatedly (Shaw et al., 2011: 17). If the history of integration is anything to go by, the return of integration runs the risk of being operationalized at a superficial level. Some of the assumptions and origins of this concept warrant closer examination and the vulnerabilities of current reforms should be clarified. Building on work by Bevan and Janus (2011) on delivery integration, this article explores integration through the lens of economic integration concepts. Economic theory suggests firms generally integrate to increase efficiency through economies of scale, improve their market power, and resolve the transaction costs involved with multiple external suppliers. Using the United States and England as laboratories, we apply the concepts of economic integration to understand whether expectations of integrating different kinds of providers (hospital, primary care) and different sectors (health and social care) are realistic, including why integration does or does not occur. We find unbridled enthusiasm for a more integrated health care system that expands the scope of integration to include social care (social services) in England, but a more traditional focus on health care integration in the United States. We find mixed applicability of economic theories of integration. Economies of scale are a limited motivation for integration in both countries, but are undertheorized, particularly in terms of how risk is spread in a model where providers bear risk for patient expenses. Managerial incentives for monopoly or oligopoly may be more compelling in US health care as providers seek higher prices and more leverage over payers. Integration through consolidation tends to increase costs. In both systems the concept of transaction costs provide considerable potential for understanding the drive to integrate and the potential for success in their countries. New payment/budgeting approaches in both countries require integration, but their success depends on the resolution of contracting internally in these integrated entities. Definitions of integration in economic theory Vertical integration is the process of absorption of different production functions in a single organization. A firm will vertically integrate the different stages of the

Table 1. Indicators of coordination of care in the United Kingdom and the United States, 2011

Country

Key information not shared among providers

Specialist lacked medical history or regular doctor not informed about specialist care

Gaps in hospital/surgery discharge planning

Regular doctor seemed uninformed about hospital/ surgery care

13 27 18

7 17 15

6 18 21

26 29 60

11 12 18

Medical, medication or lab error

Pharmacist or doctor did not review prescriptions in past year

Any gap

8 22 18

16 28 40

20 42 40

Notes: Selected Organization for Economic Cooperation and Development (OECD) countries include Australia, Canada, France, Germany, Netherlands, New Zealand, Norway, Sweden, Switzerland, the United Kingdom and the United States. Source: 2011 Commonwealth Fund International Health Policy Survey of Sicker Adults In Eleven Countries (Schoen et al., 2011)

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United Kingdom United States Selected OECD countries

Test results/ records not available at appointment or duplicate tests ordered

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production process under one roof: an automobile manufacturer would produce all components of the car, manufacture the spare parts, develop a lending arm to encourage car purchases, and could develop an insurance division to insure against accident and theft. In petroleum, a vertically integrated corporation might conduct research and exploration, extract oil, operate refineries, and manage fleets of trucks to transport the oil to the pump and retail sales. Services and products produced by one firm are inputs to the production process used by another (Conrad and Shortell, 1996: 8). Integration can refer to both downstream functions (backward integration) and upstream (forward integration). In health care, acute care services might be the base point, but are integrated forward toward the customer or patient, such as physician group practices that house pharmacies. Backward integration would expand the firm to include services such as medical supplies and equipment (Gillies et al., 1993: 468–469). Kaiser Permanente in the United States represents the most well developed private-sector representation on the vertical health care integration spectrum, and can be used as a benchmark for comparison. Kaiser Permanente is a not-for-profit Health Maintenance Organization (HMO) that insures and provides health care for its members. Kaiser operates a closed network and members receive care from salaried physicians in facilities owned and operated by the organization. The organization can determine the nature of care provided and limit the utilization of certain services. In contrast, conventional health insurers contract with a variety of providers; each of these providers tends to have more operational and clinical autonomy. Kaiser’s control over the production process allows more seamless service provision. A patient can see a doctor, receive a prescription and fill it onsite in a Kaiser pharmacy. When health systems are government-funded and provided, the economic definition of integration poses challenges, since economists tend to describe integration in terms of ownership. The National Health Service (NHS) in England is more of a hybrid: it is an insurer, owner and operator of a closed vertical network for (most) hospital and outpatient services. The NHS does not own general practitioner practices; therefore when the two systems are compared Kaiser is found to be more integrated, and more successful because of the integration (Feachem et al., 2002). However, as we discuss later, the nature of the contracting relationship is such that integration based on relational contracts may produce similar integrated outcomes as ownership itself, even if it differs from the classic economic definition of integration. Horizontal integration is more straightforward and occurs when a firm producing a given product expands by acquiring other firms producing broadly the same product or firms at ‘the same stage in the process of delivering services’ (Gillies et al., 1993: 468) or firms producing the same services or services that are close substitutes, joining as a ‘single firm or a strong inter-organizational alliance’ (Conrad and Shortell, 1996: 7). A hospital merger would be one example of horizontal integration; such mergers have been common in the United States but mergers are also becoming more common in England (Gaynor et al., 2012).

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Overview of economic concepts of integration Kaiser Permanente and the NHS illustrate a key puzzle of integration, which is the definition of the firm. There is no general agreement on what constitutes a firm (Gustafsson, 1990: x), and the term ‘firm’ is used in almost as general a sense in economics as the term ‘mammal’ is used in zoology covering many species (Gustafsson, 1990: x). A firm may be a small business owned and managed by a single entrepreneur, a partnership, a public corporation, global corporation or a non-profit organization. Economic analysis of the firm generally refers to commercial firms, and economic theory suggests that firms want to find their most desirable boundaries and decide how much to integrate either horizontally or vertically. Through a process of organizational design, managers define the scope and scale of the business. Decisions about whether to use in-house production, external contractors or relational contracts are needed, depending on the transaction costs associated with different strategies (Jacobides and Billinger, 2006: 249). Horizontal integration allows a firm to expand in size and scale. Thus, the determination of firm boundaries tends to be related to issues of size, transaction costs and management decisions. The first and most straightforward reason for integration is to capture economies of scale. Larger sized firms can leverage market position and purchase supplies at lower costs. This explains firms’ built in propensity toward increasing returns to scale, such as US major corporations (railroads, steel, banking, oil) targeted by anti-trust legislation in 1890 and 1914. Elsewhere, many countries nationalized these services. A second rationale for integration is to contain transaction costs. Ronald Coase (1937, 1960, 1988a, 1988b) showed that when entrepreneurs operate outside the structure of the firm, they engage in trade via spot or one-off contracts and if necessary they repeat this process time and time again. Standard microeconomics did not recognize the fact that negotiating, monitoring and enforcing contracts generates transaction costs; such as collecting the necessary data to verify the validity of production costs declared by suppliers, and monitoring the respect for the contract by contractual parties. Internal transaction costs may be equally onerous; that is the costs associated in-house production and governance of the firm. Both kinds of transaction costs may be quite substantial. Faced with transaction costs in doing business, a businessperson is not indifferent whether s/he produces within the firm or goes to external suppliers. According to Coase, a businessperson will internalize those parts of the production process previously performed by outside producers when the firm can produce directly at a lower cost. S/he will hire staff on the basis of long-term contracts with labor unions, and may prefer to accumulate capital internally rather than use lending institutions. A decision to internalize the production of goods and services creates intra-firm contractual relationships. The firm still works on the basis of contracts with other firms, but these tend to be long term. Long-term contractors are strengthened because of the reputational aspects of the relationship and the faith

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created via a long-term relationship (so-called relational contracting). The growth of the firm will continue until the costs generated by integration – that is, the costs associated with large organizations – exceed the transaction costs avoided. Building on Coase’s theories, Oliver Williamson (1975, 1985, 1988, 2002) addressed the inadequate quantity and quality of the information available for managers to estimate internal and external transaction costs. Incapable of making fully informed choices, entrepreneurs have to operate in a world of bounded rationality: much as they would like to make fully informed choices, in practice, they are obliged to accept incomplete contracts with suppliers or, alternatively, to produce the goods and services in question internally. Incomplete information means that we cannot negotiate contracts covering every eventuality. Therefore, ‘there will be a calculated effort to mislead, disguise, obfuscate and confuse’ (Williamson, 1990: 20). If we cannot rely on suppliers to provide us with accurate information on their costs, or if we have doubts regarding quality, we may decide to integrate upstream. Doubts about decisions by suppliers regarding investment in human capital may encourage a firm to absorb the production function and thus internalize human capital decisions. A third concept related to integration explores how a technically trained middle level administrative-managerial class, or ‘the visible hand of managed capitalism’ is necessary for companies to prosper (Chandler, 1977). Managers in firms develop and apply capabilities (later called ‘dynamic capabilities’) (Chandler, 1992; Mowery, 2010; Teece, 2010). Managerial teams and hierarchies apply their consistent attention to coordinating resources and developing information sources to increase coordination across their firm. However, once a firm achieves a certain scale, there is a tendency toward oligopoly. Managers use takeovers and cartels to horizontally integrate other firms and reduce competition. Their effort is directed at achieving oligopolistic market power; sometimes based on the exploitation of economies of scale and scope (Teece, 2010) or creating barriers to entry that foster the maintenance of oligopolies. Applying theories of integration to health care to physicians and hospitals in the United States Unlike in England, the story of health care in the United States could potentially be understood as a struggle between two models of health care, one highly integrated (e.g. Kaiser hospitals and clinics) and the other significantly less integrated. In the first part of the 20th century, pockets of integrated health care models flourished in the United States. These models were essentially suppressed by US physicians, who sought professional autonomy from both industrial capitalism (Starr, 1982) and national health insurance. Integrated systems faced legal challenges by physicians and state laws written to favor independent practices and professional autonomy. A de-integrated model of organization and financing based on thirdparty insurers and independent providers flourished in the United States.

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Integration in the United States typically refers to horizontal consolidation of hospitals or physicians and vertical consolidation of hospitals and physicians (Bazzoli et al., 2004). In the first category there is increasing horizontal integration: the percentage of physicians working in one or two-person practices declined from 40.7% in 1996 to 32.5% in 2004–2005, a reduction of almost 20%. The number of physicians in practices with three to five physicians decreased from 12.2% to 9.8%, while the percentage of physicians working in groups of 6–50 and 50 + physicians increased from 13.1% to 17.6% (Liebhaber and Grossman, 2007). Among almost 5000 hospitals in the United States, 3100 are designated as part of hospital systems (but systems can include a handful of free-standing hospitals) (American Hospital Association, 2014a). Vertical integration between physicians and hospitals could be measured in different ways, but hospital affiliations fell from 56% in 2001 to 38% in 2011, a decline of 32% (American Hospital Association, 2014b). However, among medical group practices with more than five physicians, nearly 28% belonged to integrated systems in 2012, and the number of system-affiliated practices has jumped by nearly 80% (Managed Care Digest, 2014). Economic theories suggest integration occurs due to scale incentives. Scale incentives for physicians usually change in response to changes in payment and reimbursement (Liebhaber and Grossman, 2007) and are of two kinds, either the minimization of financial risk of high cost patients or incentives to reduce operational costs. Horizontal integration in the 1990s was prompted by new gatekeeping and risk-sharing models introduced by health maintenance organizations that gave physician practices the incentive to spread the financial risk of capitation (Robinson and Casalino, 1996: 12). As risk increases physicians are likely to want to create organizations to spread that risk. Unlike contracts in the 1990s, newer payment models that do spread risk tend to spread risk across the continuum of the care, which would seem to suggest vertical integration seems more likely today under these models. The second main motivation is to reduce capital or practice costs (Liebhaber and Grossman, 2007. These savings are weighed against the autonomy offered by small practices, since overhead declines, but only to a point ‘after which the diseconomies of bureaucracy begin’ (Robinson and Casalino, 1996: 12). Reimbursements provided incentives to provide equipment-intensive services such as imaging and diagnostic tests that encouraged the development of single specialty practices (Liebhaber and Grossman, 2007). Electronic medical records may encourage greater integration since the marginal costs for each physician are likely to be lower in a larger organization. Larger organizations also enable investment in data collection and quality improvement, and spread the cost of negotiating, monitoring and enforcing agreements with insurers (Robinson and Casalino, 1996: 12). Vertical integration with hospitals brings management expertise, marketing, information systems and financial capital (Bazzoli et al., 2004). Hospitals seek horizontal and vertical integration to develop market share by creating an oligopolistic position against the large purchasers of their services.

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Hospitals are motivated by efficiencies of scale so they reap operational efficiencies, eliminate service duplication, convert underused patient capacity and consolidate key administrative functions (Bazzoli et al., 2004). Richard Bracken, the Chief Executive of the Hospital Corporation of America (HCA), said that the HCA saw the potential for improving and profiting under health care reform because ‘Size and scale definitely provides an advantage in terms of lowering our cost structure and sharing best practices’ (Cresswell and Abelson, 2012). Vertical integration between US hospitals and physicians also increases market share and fends off managed care and other pressures (Shortell et al., 1994; Lake et al., 2003; Bazzoli et al., 2004: 274), and allows hospitals to secure greater physician loyalty (Bazzoli et al., 2004). The drive toward market share and oligopoly seems stronger for hospitals than physicians. Chandler’s theory did not take account of managerial capabilities inside proxy organizations, such as physicians’ political organizations, that have sought to consolidate market power though professional licensing and other barriers to entry. These professional restrictions create quasi-oligopolies by virtue of the barriers to entry in their profession. Hospitals, on the other hand, have usually relied on managerial capabilities to consolidate market position: greater market power is one of the major motivations for hospitals (Lake et al., 2003) for integration. Their drive for integration might be to fend off competition from physician-owned freestanding clinics and imaging centers, as well as other hospitals in a region. They seek a more secure financial base through increased market share and greater market power in negotiations (Bazzoli et al., 2004). These efforts have the overriding goal of increasing revenue, since hospitals desire monopoly power and vertical and horizontal integration in order to increase prices (Cuellar and Gertler, 2006). Our third conceptual lens relating to transaction costs may help us understand horizontal integration, especially among US doctors. Even though doctors in the United States bear high administrative costs (Casalino et al., 2009; Morra et al., 2011), the fee-for-service payment system may have allowed smaller practices to operate with lower transaction costs, since service units are defined using standardized national service lists linked to Medicare-derived fee schedules, while the hospital system has relied on the Diagnostic Related Group system. Although this is speculative it may explain the relative ease of small practices and hospitals autonomously negotiating with insurers. However, this is likely to change, since payers such as Medicare are piloting initiatives that purportedly move from a fee-for-service system that is criticized because it is said to give providers the incentive to increase volume. Instead, payers are said to encourage service bundles that span different care providers. The drive for greater care coordination will demand new forms of contracting and potentially encourage the internalization of those transaction costs, but how these contracts work is not clear. All providers become part of the same care process, which will require more contracting.

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The extent to which clinical integration occurs depends on how the payments are structured and how complex the transaction costs are. One direct tool of payment integration is the financial incentive paid by Medicare to hospitals to discourage readmissions within 30 days. This may lead to more care coordination between physician and hospital organizations since hospitals would want to work more closely on discharge plans. Another promising model developing within primary care practices in the United States is the primary care medical home model, although these medical homes are more a form of horizontal integration than vertical. Medical homes provide a coordinated, accessible and consistent primary care practice model (much as might be taken for granted in England). These practices must be certified by a national accrediting organization and make heavy use of health information technology, seek patient engagement in care, and a team-practice approach (Klein et al., 2013). The practices usually receive small capitated payments, but largely receive the same fee-for-service payments as other practices. At the other end of the spectrum is the creation of new accountable care organizations (ACOs) within Medicare and created under the Patient Protection and Affordable Care Act (2010). ACOs create shared risk for specific Medicare enrolees among networks of providers. However, these are not HMOs since members are free to receive care from non-ACO providers. Other approaches include bundled reimbursements and new penalties that will force cooperation between providers. The extent to which these encourage integration depends on whether organizations have an incentive to integrate and internalize costs. However, some of the new integrated models lack some of the key elements of integrated delivery systems that minimize transaction costs. A key characteristic of successful integration is capitated payment and/or a global budget (Bevan and Janus, 2011), although some integrated systems actually use existing (Lee et al., 2012) fee-for-service models. Yet ACOs do not use consistently use capitation or global budgets: they use bundling and pay for performance (Burns and Pauly, 2012) as well as very traditional fee-for-service payments (Muhlestein et al., 2013). In its current form, most ACOs do not place patients within organizations that are integrated in a vertical sense. Medicare currently plans to assign patients to ACOs based on the location of their last primary care visit. Patients with no primary care history are likely to be assigned to an ACO based on visits to clinicians who are in an ACO. Every quarter the Centers for Medicare and Medicaid Services will retrospectively reconcile and update the patient list to adjust to likely changes in the assigned population. Medicare currently plans to give ACOs considerable flexibility regarding their internal distribution of resources, and it remains to be seen how the contracting process might work. But the expectation may be that ACOs will emulate highly integrated health care systems, such as the Mayo Clinic. In the Mayo Clinic, there is virtual integration of electronic medical records across inpatient and outpatient settings which results in improved efficiency (McCarthy et al., 2009).

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Thus, efforts to encourage system integration in Medicare may be less successful than hoped, especially since ‘provider integration appears to be a key marker of where ACOs are forming’ But there are some more successful models of integration, like the Massachusetts Blue Cross Blue Shield Alternative Quality Contract, which makes integrated payments on a per-patient global budget. This model takes the long view and is adjusted over 5 years. The success of this initiative may ultimately demonstrate that careful attention to economic incentives and buy-in from providers can encourage clinical integration (Song et al., 2012). Integration in England and the limits of economic theory Fundamental choices were made after the Second World War in both the United States and England, regarding the production, delivery and financing of health care. In England, health care was to be a public service financed by centrally collected taxes and delivered free to all citizens, while in the United States health care was delivered via private providers with a diversity of payers located in both the public and private sectors. The public Beveridge model predominated in England while a private insurance model became the norm in the United States. England’s coordinated and system-wide approach to integration was fundamentally different from the United States. When the NHS was created, a massive process of horizontal and vertical integration of the health care sector occurred (Wistow, 2012). Voluntary hospitals (1143) with a total of 90,000 beds and 1545 municipal hospitals with 390,000 beds were coercively nationalized. The NHS absorbed virtually all hospitals and ambulatory facilities. Other than senior specialists, all hospital doctors became NHS employees. General practitioner (GP) doctors worked for the NHS, but on a contractual basis. Simultaneously, the State assumed responsibility for the functions of the production process (financing, information, pricing, planning, redistribution). The result was a gigantic firm, currently the fifth largest employer in the world (Klein, 1995). The NHS was both a monopoly and a monopsony playing a major role in setting prices and in deciding the volume provided. Doctors made a bargain that swapped financial remuneration and virtually complete clinical autonomy for State determination of aggregate spending for the sector (Day and Klein, 1991). However, from its founding, vertical integration was incomplete in the NHS in two ways. First, GPs and senior hospital specialists had considerable clinical autonomy that created differences between GPs and specialists. These kinds of professional, institutional-legal and other differences seriously condition collaboration between doctors practicing at different stages of health care system (Bevan and Janus, 2011), such as primary and secondary care. Incomplete integration seems to have been the price paid to get the reform legislation approved in Parliament, and that pact conditioned health policy over decades. Likewise, their US counterparts agreed to Medicare on the condition that the government would not intrude on the doctor–patient relationship. Second, since the NHS was set up,

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there has been debate on the integration of health and social care. Looking back, some have argued that the historic separation between hospital and social care services is fundamental for understanding the lack of integration today, (Department of Health, 2000: 3) and that ‘local government and NHS were designed to be apart, not together’ (Wistow, 2012: 110). A more appropriate metaphor for the English NHS is a holding company, not a firm. This intriguing notion requires critical consideration, particularly in the light of continued efforts to promote competition and markets. For example, it would be necessary to establish the proportion of the revenues of the holding company (or parent company, which holds assets in other companies, for example through stock ownership) members to the central organization. These companies could be located at the distance from each other. Before devolution in the late 1990s, the United Kingdom was ‘probably the most centralized state in Western Europe’ (House of Commons Justice Committee, 2009) and likewise the NHS is a highly vertically integrated organization. This is of crucial significance for its management and involves the center being able to exercise control from the Secretary of Health right down to the local health authority manager. Here we have an example of vertical integration in a political or administrative sense rather than in an economic sense. Political control from the center is a feature that distinguishes the English NHS from other systems based on the Beveridge model, such as the Italian National Health Service, created in 1978, and the Canadian provincial health insurance system, set up in the 1960s. England’s tradition of central control, rigorous even for a unitary state, contrasted with Italy and its powerful regions and Canada with its even more autonomous provinces. Both countries give their sub-central levels of government strong constitutional powers in the health care sector. This may mean that they have relatively weaker top-down lines of political control. Both Canada and Italy have tended to make limited changes in their health systems, whereas England has been more ambitious, one major health reform following another in rapid succession. Even so, the allocation and exercise of real power in the English NHS has fluctuated between the center and periphery (Klein, 2013). The question is how this ‘triangle’ is related to fuzzy boundaries, which reflect incomplete vertical integration where responsibilities are ill defined, generating waste and inefficiency. Fuzzy, blurred boundaries may mean that it is difficult to say where the field of activity of one health firm ends and that of another begins. When for example does a GP doctor cease to be de facto an employee of the NHS and operate as a health care firm pursuing his/her personal financial interest? Large health care organizations may be particularly characterized by fuzzy internal/external production and financing. As a hierarchical and centralized organization, the quest for greater economy in the use of NHS resources first took the form of modifying arrangements for distributing responsibility among central, regional and local governments but without appreciable results. In the early 1990s the NHS set up so-called internal

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markets with GP fund-holders supposed to represent the demand side and trust hospitals the supply side. The new arrangements increased the role of managers. Efforts to evaluate the results of the internal markets showed no measurable negative or positive impact. This could be interpreted as meaning that the incentives contained in the new programs were too weak and NHS doctors and staff were impermeable to pressure for change (Le Grand et al., 1998). Between 2002 and 2005, the government made changes to the NHS institutional architecture, including mechanisms for patient choice to simulate market processes. The King’s Fund, a London think tank, studied the effect of these measures and concluded that they had neither strengthened efficiency or quality (Mays et al., 2011), despite the introduction of new remuneration systems such as pay for performance. Unfortunately, the progress toward integration has been disappointing, according to many government white papers, reports, ad hoc official inquiries, parliamentary hearings, and independent publications (see Wistow, 2012). While previous efforts stressed the importance of quality of care, as well as a close and continuing collaboration between health care and social care authorities, these aspirations has fallen short (Wistow, 2012). At this point, some have argued that it is time to ‘move beyond arguing for integration to making it happen’ (Field, 2011: 20); ‘Service users continue to experience basic and enduring problems of service fragmentation, notwithstanding decades of initiatives and apparent commitment’ (Wistow, 2012: 109). Future analyses of this integration failure might consider Bevan and Janus’ (2011) emphasis on the professional, institutional-legal and other differences between GPs and specialists that prevent collaboration between doctors practicing at different stages of health care system. However, some government analyses are more optimistic: a report from a high level group on the future of integration in health (Department of Health, 2012) describes concrete efforts to integrate social care and develop the same kind of budgetary instruments already devised for clinical care (tariffs, non-clinical tariffs, multi-disciplinary groups, mechanisms to promote choice). The NHS Commissioning Board’s guidance will request commissioning ‘for people, not specific diseases’. Pilots underway include personal health budgets where patients can receive the cash equivalent of the service cost (Glasby et al., 2011). An important initiative is the introduction of joint Health and Wellbeing Boards and the allocation of part of the NHS budget to support local authority social services. There is an emphasis on developing better patient pathways and greater use of electronic medical records. Horizontal integration among GPs in England has not reached the level it has in the United States (and where it is still less developed than economic theory might predict). While the average size of GP practices has increased over time, and the single-handed GP is now very much the exception: on average GP practices have 4.5 doctors and 6900 patients. There is no indication of hospitals setting up GP practices, but it could happen under the new system. However, Gaynor et al. (2012) report an increase in the number of hospital mergers.

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Promotion of just such a culture is the rationale behind changes proposed to Parliament in 2010. The package was highly controversial and criticized for eroding the underlying principles of the NHS. As a result of these changes, managers will pass the decision making over to GPs (Black, 2010; Secretary of State for Health, 2010; Mays et al., 2011) and GPs will be grouped together in several hundred non-profit GP Commissioning Consortia and regulated by a central agency. This is intended to generate major savings in the NHS, due to fewer managers and reduced administrative costs. However, predicting those reductions is probably more difficult than the government acknowledges. These evolving reforms contradict expectations about transaction costs, echoing the point made earlier about the architects of US reform paying less attention to the role of transaction costs in integration. Reform proposals do not mention the term ‘transaction costs’; likewise reform proponents or its opponents debating the reforms have not mentioned the term. Supporters of the reforms hold that major cuts in total expenditure are possible via cuts in management and that these cuts will increase rather than adversely affect efficiency. There appears to be a belief that transaction cost levels can be set by government command. What is striking to outsiders about England is the apparent rigor of the ‘business culture’ adhered by those holding influential positions in the health-social welfare establishment. Examples of the support for a more entrepreneurial culture is evident in the NHS Future Forum (Department of Health, 2012) and the report by the King’s Fund on the new body created by the government (Humphries and Galea, 2013). However, evaluations of some market reforms have not found that this culture is improving health care. A study of hospital mergers in the English NHS finds that, while spare capacity fell, labor productivity did not rise and financial deficits increased, and there was no apparent improvement in quality of care (Gaynor et al., 2012). Conclusion The article sought to define and harden the concept of integration and the current enthusiasm for integrating health care in the United States and England, which involves analyzing why integration is thought to be needed, the kinds of integration taking place or proposed, the degree of integration, and understanding the interpretation of integration in each country. The problem, as conceived across the United States and England, is the lack of coordinated care, particularly at the hospital-community nexus, but also in the social care to health care continuum in England. A more traditional and narrower integration of health care is concerned with better integrating the care process horizontally (such as making sure test results are transmitted from a GP to another community-based provider) and vertically (between the doctor’s office and hospital). Evidence suggests that integration has been relatively modest in both countries; where it has occurred it is more likely to be horizontal integration, such as hospital mergers (in the United

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States and more recently in England) and among doctors forming larger practices (in the United States but less prevalent in England). Aside from seeking more clarification of the concept, we also explored the utility of using economic models for understanding integration in health care, especially economies of scale, transaction cost theory, and managerial incentives that encourage monopolies. Our investigation shows that some economic concepts are more applicable than others. The major reasons why there is mixed applicability is that – as economists frequently acknowledge – health care has unique characteristics, and second, because political bargains at key historical junctures have structured the incentives for system integration. Political decisions have usually had the effect of protecting doctor autonomy and ensuring continuation of de-integrated systems. For example, in the United States, a vigorous campaign to legally protect doctors and prevent organizations like Kaiser from multiplying created self-reinforcing systems of de-integration and prevented the growth of salaried medicine. Later, the creation of Medicare perpetuated the bifurcated system of insurers, doctors, and hospitals operating separately. In England (and in many countries), GPs were never fully folded into the salaried (and integrated) health care system. Much of the political economy of both systems has been described elsewhere, but looking at this history exclusively from the perspective of care integration shows how fragmentation has been protected by the political process. But even if we recognize that health care is not operating like other markets, our first observation is that scale incentives are surprisingly weak as inducements for integration. Granted, we did not assess pharmaceuticals, where large-scale purchasing or contracting does occur, however, the contrast between other industries and health care suggests that the human-capital intensive nature of health care along with its geographic separation may be clues to the patterns of integration. Although large-scale quasi-vertical integration does occur in government-operated systems like the NHS, the reasons are not economic; instead the rationale is political control. Today in England, the trend is toward greater localization rather than centralization. Second, we could explain integration according to the incentives for market share; however, in both countries there are limits on the development of monopolies. In England there is a limited role for the private sector and in the United States anti-trust laws limit monopoly power. However, this will be tested going forward in reimbursement models that have encouraged greater industry consolidation. A third concept examined was transaction costs. In both countries, this is the most helpful for understanding the potential for, and limits of health care integration. New payment or budgetary incentives either encourage (or demand, in England) integration because they are directed beyond individual services and across the care continuum. However, whether providers embrace these new incentives will depend on their ability to minimize transaction costs and/or

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determine the allocation of revenue across providers. The success of these ultimately will depend on the adequate resolution of contracting and transaction costs (monitoring, enforcement). Finally, our review suggests there are a few areas where further development of these concepts might be helpful for scholars and policymakers. First, if scale efficiencies have been limited to date, then is there potential for greater economies of scale, even in public systems like the NHS? Second, more careful consideration of transaction costs and contracting between organizations that was recognized in the 1990s as an issue might increase the success of new payment and budgeting models. Understanding exactly how these contracting arrangements work, how they are enforced and what monitoring mechanisms are used, is a question of practical significance. Cross-sector contracting between health and social care sectors works in England seems challenging and the success of these reforms will depend a great deal on the internal processes within these new ‘firms’. Finally, the review points to a large gap in our ability to say how much integration has occurred and traditional measures based on economic theory are not sufficient because they tend to be based on ownership and/or size of entities, such as the average number of physicians in a practice. Given the fuzzy boundaries of firms and the likelihood of relational contracts to underpin integration, more nuanced measures of integration would be helpful. We argued that the best metaphor for the English NHS is a holding company, for example. But rather than work to reduce the fuzziness of boundaries, a better strategy might be to measure integration from a patient’s experience of the care process. International surveys that compare care coordination are one place to begin (see Schoen et al., 2011) in much the same way that measuring the number of providers is a crude measure compared with measuring the time it takes to get an appointment, for example. If social services and/or health care are to be integrated, the level of integration needs to be measured from the extent to which it actually integrates care for the user. What matters to a patient is not necessarily the ownership or the contracting arrangements, but their experience of integrated services. Acknowledgments The authors thank to Adam Oliver for facilitating and encouraging this collaboration and comments and comments from Rudolf Klein, Larry Brown, Sherry Glied, and Michael Gusmano on earlier drafts. They are very grateful for Andrea Popovech's thorough research assistance. Miriam Laugesen is supported by a Robert Wood Johnson Foundation Investigator Award.

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