The dynamics and limits of corporate growth in health care

Health Affairs

Volumn 15, Issue 2, 1996, Pages

  Robinson, James C ^a  

^a UNIVERSITY OF CALIFORNIA   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

ARTICLE; ECONOMIC ASPECT; HEALTH CARE FACILITY; HEALTH CARE POLICY; HEALTH INSURANCE; HOSPITAL MANAGEMENT; HOSPITAL ORGANIZATION; INTEGRATED HEALTH CARE SYSTEM; LAW; MULTIHOSPITAL SYSTEM; NONBIOLOGICAL MODEL; ORGANIZATION AND MANAGEMENT; UNITED STATES;

ANTITRUST LAWS; DELIVERY OF HEALTH CARE, INTEGRATED; ECONOMIC COMPETITION; HEALTH FACILITY MERGER; HEALTH POLICY; HOSPITAL RESTRUCTURING; MANAGED CARE PROGRAMS; MODELS, ORGANIZATIONAL; MULTI-INSTITUTIONAL SYSTEMS; PRODUCT LINE MANAGEMENT; UNITED STATES;

EID: 0006557342     PISSN: 02782715     EISSN: None     Source Type: Journal    
DOI: 10.1377/hlthaff.15.2.155     Document Type: Article

References (36)

1. The dominant tradition in microeconomic theory and antitrust policy emphasizes price competition among similar firms producing similar products and downplays product and process innovation as competitive strategies. It casts a skeptical eye on large firms and hence on the horizontal and vertical integration, product diversification, and channel diversification that permit those firms to grow large. This conceptual frame' work is embedded in the populist political tradition in America, according to which big is bad (big business, big government). The alternative tradition, attributed most prominently to Joseph Schumpeter, focuses on innovation as a competitive strategy and develops a more favorable interpretation of large scale and scope, integration, and diversification. See J.A. Schumpeter, Capitalism, Socialism, and Democracy, 3d ed. (New York: Harper and Row, 1950). Other prominent works in this tradition include R.R. Nelson and S.G. Winter, An Evolutionary Theory of Economic Change (Cambridge, Mass.: Harvard University Press, 1982); and A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass.: Harvard University Press, 1990).
2. The dominant tradition in microeconomic theory and antitrust policy emphasizes price competition among similar firms producing similar products and downplays product and process innovation as competitive strategies. It casts a skeptical eye on large firms and hence on the horizontal and vertical integration, product diversification, and channel diversification that permit those firms to grow large. This conceptual frame' work is embedded in the populist political tradition in America, according to which big is bad (big business, big government). The alternative tradition, attributed most prominently to Joseph Schumpeter, focuses on innovation as a competitive strategy and develops a more favorable interpretation of large scale and scope, integration, and diversification. See J.A. Schumpeter, Capitalism, Socialism, and Democracy, 3d ed. (New York: Harper and Row, 1950). Other prominent works in this tradition include R.R. Nelson and S.G. Winter, An Evolutionary Theory of Economic Change (Cambridge, Mass.: Harvard University Press, 1982); and A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass.: Harvard University Press, 1990).
3. The dominant tradition in microeconomic theory and antitrust policy emphasizes price competition among similar firms producing similar products and downplays product and process innovation as competitive strategies. It casts a skeptical eye on large firms and hence on the horizontal and vertical integration, product diversification, and channel diversification that permit those firms to grow large. This conceptual frame' work is embedded in the populist political tradition in America, according to which big is bad (big business, big government). The alternative tradition, attributed most prominently to Joseph Schumpeter, focuses on innovation as a competitive strategy and develops a more favorable interpretation of large scale and scope, integration, and diversification. See J.A. Schumpeter, Capitalism, Socialism, and Democracy, 3d ed. (New York: Harper and Row, 1950). Other prominent works in this tradition include R.R. Nelson and S.G. Winter, An Evolutionary Theory of Economic Change (Cambridge, Mass.: Harvard University Press, 1982); and A.D. Chandler, Scale and Scope: The Dynamics of Industrial Capitalism (Cambridge, Mass.: Harvard University Press, 1990).
4. For example, see R.H. Bork, The Antitrust Paradox: A Policy at War with Itself (New York: Basic Books, 1978).
5. For examples, see J. Zwanziger, G. Melnick, and K.M. Eyre, "Hospitals and Antitrust: Defining Markets, Setting Standards," Journal of Health Politics, Policy and Law (Summer 1994): 423-447; J.M. Klingensmith, "Applying Antitrust Concepts to the Acute Care Hospital Industry: Defining the Relevant Market for Hospital Services," Journal of Health Politics, Policy and Law (Spring 1988): 153-165; and M.A. Morrissey, F.A. Sloan, and J. Valvona, "Defining Geographic Markets for Hospital Care," Journal of Law and Contemporary Problems 51 (1988): 165-194. For a comprehensive review of antitrust policy for horizontal merger in health care, see J.B. Baker, "The Antitrust Analysis of Hospital Mergers and the Transformation of the Hospital Industry," Law and Contemporary Problems 51 (1989): 93-164. For an analysis of state antitrust activities, see U.S. General Accounting Office, Health Care: Federal and State Antitrust Actions concerning the Health Care Industry, GAO/HEHS-94-220 (Washington: GAO, August 1994).
6. For examples, see J. Zwanziger, G. Melnick, and K.M. Eyre, "Hospitals and Antitrust: Defining Markets, Setting Standards," Journal of Health Politics, Policy and Law (Summer 1994): 423-447; J.M. Klingensmith, "Applying Antitrust Concepts to the Acute Care Hospital Industry: Defining the Relevant Market for Hospital Services," Journal of Health Politics, Policy and Law (Spring 1988): 153-165; and M.A. Morrissey, F.A. Sloan, and J. Valvona, "Defining Geographic Markets for Hospital Care," Journal of Law and Contemporary Problems 51 (1988): 165-194. For a comprehensive review of antitrust policy for horizontal merger in health care, see J.B. Baker, "The Antitrust Analysis of Hospital Mergers and the Transformation of the Hospital Industry," Law and Contemporary Problems 51 (1989): 93-164. For an analysis of state antitrust activities, see U.S. General Accounting Office, Health Care: Federal and State Antitrust Actions concerning the Health Care Industry, GAO/HEHS-94-220 (Washington: GAO, August 1994).
7. For examples, see J. Zwanziger, G. Melnick, and K.M. Eyre, "Hospitals and Antitrust: Defining Markets, Setting Standards," Journal of Health Politics, Policy and Law (Summer 1994): 423-447; J.M. Klingensmith, "Applying Antitrust Concepts to the Acute Care Hospital Industry: Defining the Relevant Market for Hospital Services," Journal of Health Politics, Policy and Law (Spring 1988): 153-165; and M.A. Morrissey, F.A. Sloan, and J. Valvona, "Defining Geographic Markets for Hospital Care," Journal of Law and Contemporary Problems 51 (1988): 165-194. For a comprehensive review of antitrust policy for horizontal merger in health care, see J.B. Baker, "The Antitrust Analysis of Hospital Mergers and the Transformation of the Hospital Industry," Law and Contemporary Problems 51 (1989): 93-164. For an analysis of state antitrust activities, see U.S. General Accounting Office, Health Care: Federal and State Antitrust Actions concerning the Health Care Industry, GAO/HEHS-94-220 (Washington: GAO, August 1994).
8. For examples, see J. Zwanziger, G. Melnick, and K.M. Eyre, "Hospitals and Antitrust: Defining Markets, Setting Standards," Journal of Health Politics, Policy and Law (Summer 1994): 423-447; J.M. Klingensmith, "Applying Antitrust Concepts to the Acute Care Hospital Industry: Defining the Relevant Market for Hospital Services," Journal of Health Politics, Policy and Law (Spring 1988): 153-165; and M.A. Morrissey, F.A. Sloan, and J. Valvona, "Defining Geographic Markets for Hospital Care," Journal of Law and Contemporary Problems 51 (1988): 165-194. For a comprehensive review of antitrust policy for horizontal merger in health care, see J.B. Baker, "The Antitrust Analysis of Hospital Mergers and the Transformation of the Hospital Industry," Law and Contemporary Problems 51 (1989): 93-164. For an analysis of state antitrust activities, see U.S. General Accounting Office, Health Care: Federal and State Antitrust Actions concerning the Health Care Industry, GAO/HEHS-94-220 (Washington: GAO, August 1994).
9. For examples, see J. Zwanziger, G. Melnick, and K.M. Eyre, "Hospitals and Antitrust: Defining Markets, Setting Standards," Journal of Health Politics, Policy and Law (Summer 1994): 423-447; J.M. Klingensmith, "Applying Antitrust Concepts to the Acute Care Hospital Industry: Defining the Relevant Market for Hospital Services," Journal of Health Politics, Policy and Law (Spring 1988): 153-165; and M.A. Morrissey, F.A. Sloan, and J. Valvona, "Defining Geographic Markets for Hospital Care," Journal of Law and Contemporary Problems 51 (1988): 165-194. For a comprehensive review of antitrust policy for horizontal merger in health care, see J.B. Baker, "The Antitrust Analysis of Hospital Mergers and the Transformation of the Hospital Industry," Law and Contemporary Problems 51 (1989): 93-164. For an analysis of state antitrust activities, see U.S. General Accounting Office, Health Care: Federal and State Antitrust Actions concerning the Health Care Industry, GAO/HEHS-94-220 (Washington: GAO, August 1994).
10. W.J. Baumol, "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review 12 (1982): 1-15.
11. Chandler, Scale and Scope.
12. R.D. Willig, "Multiproduct Technology and Market Structure," American Economic Review 69 (1979): 346-351; and D.J. Teece, "Economies of Scope and the Scope of the Enterprise," Journal of Economic Behavior and Organization 1 (1980): 223-247.
13. R.D. Willig, "Multiproduct Technology and Market Structure," American Economic Review 69 (1979): 346-351; and D.J. Teece, "Economies of Scope and the Scope of the Enterprise," Journal of Economic Behavior and Organization 1 (1980): 223-247.
14. M.C. Jensen, "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review 76 (1986): 323-329; and M.C. Jensen, "Eclipse of the Public Corporation," Harvard Business Review (September-October 1989): 61-74.
15. M.C. Jensen, "Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers," American Economic Review 76 (1986): 323-329; and M.C. Jensen, "Eclipse of the Public Corporation," Harvard Business Review (September-October 1989): 61-74.
16. D.J. Teece, "Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing, and Public Policy," Research Policy 15 (1986): 285-305.
17. Information sharing among competitors raises fears of collusion and price fixing. The Department of Justice and the Federal Trade Commission are exploring the antitrust implications of cooperative activities among physicians who do not share risk (for example, through capitation), which has heretofore been interpreted as a per se violation of the antitrust statutes. See Prepared Statement of Robert Pitofsky, chairman, Federal Trade Commission, before the Committee on the Judiciary, U.S. House of Representatives, 27 February 1996. The case for flexible interpretation of cooperative efforts among competing firms in dynamic industries is made by T.M. Jorde and D.J. Teece, "Antitrust Policy and Innovation: Taking Account of Performance Competition and Competitor Cooperation," Journal of Institutional and Theoretical Economics 147 (1991): 118-144; and D.J. Teece, "Information Sharing, Innovation, and Antitrust," Antitrust Law Journal 62 (1994): 465-481. Jorde and Teece do not consider the health care applications of their argument. It is quite possible that the physician services market is an instance in which antitrust concern is warranted, given the long history of anticompetitive behavior and boycotts.
18. Information sharing among competitors raises fears of collusion and price fixing. The Department of Justice and the Federal Trade Commission are exploring the antitrust implications of cooperative activities among physicians who do not share risk (for example, through capitation), which has heretofore been interpreted as a per se violation of the antitrust statutes. See Prepared Statement of Robert Pitofsky, chairman, Federal Trade Commission, before the Committee on the Judiciary, U.S. House of Representatives, 27 February 1996. The case for flexible interpretation of cooperative efforts among competing firms in dynamic industries is made by T.M. Jorde and D.J. Teece, "Antitrust Policy and Innovation: Taking Account of Performance Competition and Competitor Cooperation," Journal of Institutional and Theoretical Economics 147 (1991): 118-144; and D.J. Teece, "Information Sharing, Innovation, and Antitrust," Antitrust Law Journal 62 (1994): 465-481. Jorde and Teece do not consider the health care applications of their argument. It is quite possible that the physician services market is an instance in which antitrust concern is warranted, given the long history of anticompetitive behavior and boycotts.
19. J.C. Robinson, "The Changing Boundaries of the American Hospital," The Milbank Quarterly 72 (1994): 259-275; and D.A. Conrad and W.L. Dowling, "Vertical Integration in Health Services: Theory and Management Implications," Health Care Management Review 15, no. 4 (1990): 15-22.
20. J.C. Robinson, "The Changing Boundaries of the American Hospital," The Milbank Quarterly 72 (1994): 259-275; and D.A. Conrad and W.L. Dowling, "Vertical Integration in Health Services: Theory and Management Implications," Health Care Management Review 15, no. 4 (1990): 15-22.
21. S.M. Shortell, R.R. Gillies, and D.A. Anderson, "The New World of Managed Care: Creating Organized Delivery Systems," Health Affairs (Winter 1994): 46-64; and Governance Committee, The Grand Alliance: Vertical Integration Strategies for Physicians and Health Systems (Washington: The Advisory Board Company, 1993).
22. S.M. Shortell, R.R. Gillies, and D.A. Anderson, "The New World of Managed Care: Creating Organized Delivery Systems," Health Affairs (Winter 1994): 46-64; and Governance Committee, The Grand Alliance: Vertical Integration Strategies for Physicians and Health Systems (Washington: The Advisory Board Company, 1993).
23. J.C. Robinson and L.C. Casalino, "Vertical Integration and Organizational Networks in Health Care," Health Affairs (Spring 1996): 7-22.
24. M.L. Katz, "Vertical Contractual Relations," in Handbook of Industrial Organisation, ed. R. Schmalensee and R.D. Willig (Amsterdam: North Holland, 1989), 656-721; and M.K. Perry, "Vertical Integration: Determinants and Effects," in Handbook of Industrial Organisation, 185-255.
25. M.L. Katz, "Vertical Contractual Relations," in Handbook of Industrial Organisation, ed. R. Schmalensee and R.D. Willig (Amsterdam: North Holland, 1989), 656-721; and M.K. Perry, "Vertical Integration: Determinants and Effects," in Handbook of Industrial Organisation, 185-255.
26. Information on WellPoint was obtained from the trade press and from interviews with Leonard D. Schaeffer (chairman and chief executive officer), Ron Williams, Andrew Allocco, Max Brown, David Ludwig, Ferial Bahremand, and others.
27. Information on UniHealth was obtained from the trade press and from interviews with Terry Hartshorn (president and chief executive officer), John Austin, Dennis Strum, Layton Crouch, James Yoshioka, Arthur Southam (CareAmerica), Barbara Shaw and Victor Corsiglia (San Jose Medical Group), Steven Aharonian (Facey Medical Group), Frederick McKay and Reginald Friesen (Huntington Provider Group), and others. Information on PacifiCare was obtained from Alan Hoops (president and chief executive officer), Craig Schub, Chris Wing, Rick Badger, Cathleen Batteer, Sam Ho, and others.
28. Information on Mullikin was obtained from the trade press and from interviews with Mark Wagar (chief operating officer, Western Region), Norman Vinn (Mullikin IPA), Andrew Adams, Richard Ferreira, Gertrude Carter, David Mintz, and others.
29. The classic references on the firm as a response to cognitive and motivational problems include C.I. Barnard, The Functions of the Executive (Cambridge, Mass.: Harvard University Press, 1938); and H.A. Simon, Administrative Behavior, 2d ed. (New York: MacMillan, 1961). For an analysis of the multidivisional firm, see O.E. Williamson, "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature 19 (1981): 1537-1568.
30. The classic references on the firm as a response to cognitive and motivational problems include C.I. Barnard, The Functions of the Executive (Cambridge, Mass.: Harvard University Press, 1938); and H.A. Simon, Administrative Behavior, 2d ed. (New York: MacMillan, 1961). For an analysis of the multidivisional firm, see O.E. Williamson, "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature 19 (1981): 1537-1568.
31. The classic references on the firm as a response to cognitive and motivational problems include C.I. Barnard, The Functions of the Executive (Cambridge, Mass.: Harvard University Press, 1938); and H.A. Simon, Administrative Behavior, 2d ed. (New York: MacMillan, 1961). For an analysis of the multidivisional firm, see O.E. Williamson, "The Modern Corporation: Origins, Evolution, Attributes," Journal of Economic Literature 19 (1981): 1537-1568.
32. O.E. Williamson, The Economic Institution of Capitalism (New York: Free Press, 1985).
33. P.R. Milgrom, "Employment Contracts, Influence Activities, and Efficient Organizational Design," Journal of Political Economy 96 (1988): 42-60.
34. For an overview of the economic literature on innovation, see G. Dosi, "Sources, Procedures, and Microeconomic Effects of Innovation," Journal of Economic Literature 26 (1988): 1120-1171.
35. U.S. Department of Justice and the Federal Trade Commission, Statements of Enforcement Policy and Analytical Principles relating to Health Care and Antitrust (27 September 1994).
36. The cognoscenti will recognize this language. Others can trace it to Schumpeter, Capitalism, Socialism, and Democracy, 84.