In recent years, the Australian healthcare sector has seen some major changes. One of the key trends shaping the industry is the concept of ‘healthcare vertical integration’. This term refers to the consolidation of healthcare services, from primary care to specialist treatments, under a single organisational umbrella. In this article, we’ll take a closer look at healthcare vertical integration and examine its impact on the Australian healthcare sector, and on healthcare executives in particular.

What is vertical integration in healthcare?

The healthcare sector is made up of all businesses involved in the provision and coordination of medical products and services. The traditional economic definition of vertical integration is where two or more stages of production or distribution that are usually separate are combined in single ownership. In healthcare, this means integration across organisations in the health system aimed at improving primary healthcare delivery and providing coordinated, patient-centred care. It allows for the benefits of economies of scale to be passed down to users, while at the same time delivering improved return on investment for organisations.

The complexity of the Australian healthcare system

At times, the Australian healthcare system can seem complex, but a report titled ‘Australian Health Services: Too Complex to Navigate?’ by Victoria University sheds some light on its inner workings. The report highlights that the multitude of providers, payment models and regulations in the Australian healthcare system often leaves patients feeling lost. In addition, this complexity can lead to inefficiencies, service duplications and fragmented care – all of which impact patient outcomes and cost money. The paper calls for a more streamlined and integrated approach to health services delivery. Naturally, such a concept will be especially interesting to healthcare executives seeking to improve service delivery in their organisations.

With this in mind, vertical integration in healthcare offers a promising remedy for these issues by simplifying the patient journey, reducing administrative burdens and enhancing care coordination. This approach aligns with the government's drive towards a more patient-focused and efficient healthcare system, as first outlined in 2013's National Primary Healthcare Strategic Framework. 

Why is healthcare vertical integration needed?

Healthcare is generally a very robust sector. Indeed's senior economist Callam Pickering says that the industry accounts for 30% of employment gains in Australia since February 2020 – that’s around 360,000 people joining the industry. This figure is 2.3 times higher than the next biggest contributor to growth, professional services, showing that Australia’s jobs boom has been driven by healthcare and social assistance. According to the same data, Australia’s population aged 15+ has increased by 2.8% over the past year, making it higher than at any point in the past 45 years, leading to higher demand for health services.

Recent research also highlights an urgent need for improvements to the healthcare system in Australia. A University of Sydney report reveals a worrying inequity in healthcare service utilisation, demonstrating a clear link between poverty and health. Individuals from socio-economically disadvantaged areas tend to be less likely to make use of healthcare services for the same ailments as their counterparts in higher-income areas. 

Australia's world-class health system is becoming increasingly unaffordable for its citizens. According to a PwC report, while 86% of all Medicare services are bulk-billed and 10% of our GDP is spent on healthcare, many Australians still pay out-of-pocket for Medicare services. And, high out-of-pocket expenses rank Australia at the upper end of OECD averages for individual healthcare costs, according to the Institute of Health and Welfare.

To address these challenges and ensure long-term solutions with improved health outcomes, new patient-centric integrated care models are the way to go.

A comprehensive approach to healthcare vertical integration in Australia

Healthcare vertical integration is a strategic approach that aims to streamline the delivery of healthcare services by bringing various components of the healthcare system together. Importantly, this approach goes beyond simply owning or controlling multiple aspects of healthcare provision along the supply chain. Rather, it fosters collaboration among different healthcare providers, such as hospitals, clinics, pharmacies and insurers, to enhance patient care, reduce costs and improve outcomes overall.

The PwC report highlights some potential benefits of vertical healthcare integration: improved care coordination, more efficiency and better patient experiences. By aligning different healthcare elements, typically under the guidance of well-informed executives, organisations can offer holistic and seamless care, ultimately supporting patient health.

Consolidation, standardisation and interconnectedness

Vertical integration in healthcare typically involves a degree of consolidation within a specific area of the healthcare value chain. In the Australian context, vertical integration might encompass various stages of patient care, such as primary care, hospital services and pharmaceuticals, for example. This approach allows organisations to oversee the entire continuum of care, from initial diagnosis right through to post-treatment follow-ups.

A critical advantage of vertical integration in healthcare is the ability to standardise and coordinate care across very different healthcare settings. For example, when a healthcare organisation integrates vertically by acquiring both primary care clinics and specialised hospitals, it can ensure that patient data and treatment plans seamlessly transition between these entities. This interconnectedness can lead to a reduction in medical errors and better patient outcomes.

Distinguishing horizontal and vertical integration in healthcare

While vertical integration is based on different types of healthcare providers along the care continuum collaborating, horizontal integration instead focuses on consolidating similar types of providers. For instance, horizontal integration typically takes the form of mergers or acquisitions between hospitals or clinics. Although this approach tends to lead to increased market share, it doesn’t automatically mean better coordination of care.

In contrast, vertical integration comprises a broader range of service providers and stakeholders, thus fostering a more holistic approach to healthcare delivery. In Australia’s fragmented and complex healthcare sector, this is particularly relevant.

Examples of vertical integration in Australia

Prominent examples of vertical integration in the Australian healthcare sector include Ramsay Health Care, Sonic Healthcare, Cochlear and the Royal Melbourne Hospital – all organisations that manage various aspects of healthcare delivery.

  • Ramsay Health Care is Australia’s largest private hospital operator and owns and operates its own pharmacies and imaging centres.
  • Sonic Healthcare is Australia’s largest pathology provider and owns and operates its own pathology labs and medical centres.
  • Cochlear is Australia’s leading medical device manufacturer and owns and operates its own research and development facilities, manufacturing plants and distribution channels.
  • Royal Melbourne Hospital is working closely with community-based health services, drawing on shared electronic health records, aligned clinical protocols and collaborative training initiatives, which has led to a reduction in hospital admissions and improved patient satisfaction rates.

Future considerations and challenges for vertical integration

Although vertical integration holds immense promise in healthcare, in particular, there are some concerns about effects such as reduced competition and market power concentration, as this may potentially lead to higher healthcare costs. This is a particular concern if vertical integration includes private health insurers, something which many healthcare providers have pushed back against as having the potential to limit their autonomy in medical matters.  

To combat these potential issues, regulatory oversight and policies need to be put in place as safeguards and continually reviewed to foster fair competition among all stakeholders and service providers. What’s more, data sharing and interoperability challenges between different provider systems may make vertical integration difficult. These challenges can be overcome by developing standardised health information exchange platforms such as the one used by eHealth NSW. One of the outcomes of vertical integration must be to ensure that patient data flows securely and efficiently across diverse care settings.

For healthcare executives, it's important to stay up-to-date on relevant developments and legislative changes to continue delivering the best possible care.

The future of healthcare in Australia

In general, the healthcare sector tends to be less sensitive to changes in economic conditions, says Callam Pickering, predicting that the demand for healthcare workers will prove more resilient than most other industries. Healthcare vertical integration, then, is a substantial shift in the Australian healthcare sector, with the potential for many positive effects for providers and patients alike. By harmonising care delivery components, vertical integration streamlines services, improves outcomes and ideally reduces costs. Investing in vertical integration may be an effective way for Australian healthcare executives to truly make a difference to their organisation and the people they care for.

All in all, vertical integration offers a potential path towards innovation and equity that may help reduce some complexities of Australia’s current healthcare system. It is an opportunity for providing more patient-centred, efficient and sustainable healthcare services to the Australian public.