Integration and Diversification in Healthcare: Financial Performance and Implications for Medicare

By Jones, Jane | Health Sociology Review, April 2007 | Go to article overview
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Integration and Diversification in Healthcare: Financial Performance and Implications for Medicare


Jones, Jane, Health Sociology Review


ABSTRACT

This exploratory study compares the financial performance of all companies listed on the Australian Stock Exchange pursuing vertical or virtual integration, horizontal integration or diversification in the pathology, diagnostic imaging and general practice sub-sectors over 2001-2005. Financial ratio analysis indicates vertical integration is the most profitable strategy. Accounting measures of performance also show horizontal integration is profitable; however, recent market developments raise questions about the viability over the long-term of horizontal integration of diagnostic imaging practices as a core business in the context of public corporations. With one exception, the study also found medical centres yield modest to poor financial performance, suggesting the revenue generated directly by general practice is unlikely to provide sufficient returns for GPs and investors, and is probably a result of cross-subsidies from diagnostic services owned or provided by the corporation. As all firms that provide general practice also provide diagnostic services, collectively, results provide tentative empirical support for the proposition that the value of general practice, at least to some listed corporations, is not in general practice per se, but its ability to generate referrals. The findings have significant implications for the public financing of health care services. These include: the potential for increased expenditure on healthcare from co-locating general practice with diagnostic services; the extent to which the provision of medical services by listed corporations represents the best use of limited public funds; and the efficacy of the use of Medicare to finance offshore expansion by public Australian companies.

KEY WORDS

Sociology, pathology, general practice; hospital ownership, Medicare, health care services financing

Received 2 February 2007 Accepted 20 February 2007

Introduction

In Australia, as elsewhere, the nature and organisation of medical practice is undergoing significant change. Over the past few years, a number of models of corporate medical practice have emerged. These models range from the relatively simple management service model at one end of the continuum, to the actual divestment of medical practice and employment status at the other (AMA 2001). Thus at one end of the continuum, a corporate entity may simply take over the administration of existing medical practices in exchange for an agreed fee. At the other end of the continuum, substantial market penetration has been achieved by large public companies acquiring and integrating general practices, diagnostic imaging and/or pathology practices. In some cases, these services are colocated into multi-purpose healthcare facilities, together with ancillary services, and sometimes, hospitals. This represents the vertically integrated delivery system, consisting of multiple providers covering the full continuum of healthcare.

Although corporatisation of medical services is not a new phenomenon, there has been an accelerating trend in corporatisation in Australia in recent years, with Catchlove (2001:68) concluding '[t]his process appears inevitable and unstoppable'. Yet while there is significant debate occurring within the medical profession, government, media and wider community concerning the rationalisation of healthcare providers and growth of corporatised healthcare, relatively little academic research has focussed on the financial performance of listed corporations pursuing integration and growth in medical services. This lack of work is surprising, given corporatisation of medical practices is seen by some as a more convenient vehicle compared to traditional practice models through which private health commerce may be effectively organised and conducted on a large scale (AMA 2001).

The purpose of this exploratory study is to begin to fill the identified gap by means of an empirical examination of the financial performance of companies listed on the Australian Stock Exchange (ASX) pursuing integration and growth in pathology, diagnostic imaging and/or general practice.

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