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Summary HPIM4001: Economics of Healthcare - Case 4: Innovations from an organizational (economics) perspective

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Maastricht University (UM)

HPIM4001: Economics of Healthcare. Case 4. All lectures and literature is integrated. Lectures are in black, while literature is in red.

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Type Samenvatting

hpim4001
economics of healthcare
case 4
maastricht university
innovations from an organizational economics perspective

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Case 4: Innovations from an organizational (economics) perspective
Susan, Mike and George are on their way to another conference session. This session is about
organizational innovations (e.g. vertical and horizontal integration) and the role that innovation plays
in organizations.
The session is started with a general talk by the chairman who introduces three speakers. “Welcome
to our first speaker who is an economist from the UK”, the chairman says.
Speaker 1: “Thank you, mister chairman, ladies and gentlemen. During my presentation, I will try to
describe that decisions to innovate are usually made at the level of a firm. However, as there are
different types of firms, innovation will play a different role in each firm. The effects of innovation on
the costs of these firms will also vary. I will try to describe some of these differences and effects. At
the start of my presentation, I want to ask you whether you think there are differences between
competitive and monopoly firms as regards innovation”. Susan, who hears this question, has never
thought of such a difference. “I think not”, she says, “As long as all these firms have the same goal of
profit maximization, there will be no difference with respect to innovation”. Other audience
members do not agree with Susan.
After an extensive discussion between the first speaker and the audience, the chairman welcomes
the second speaker. She is an economist from the US who has a special interest in transaction cost
economics.
Speaker 2: “Thank you all. The previous speaker talked about innovation and the firm. Therefore, I
want to start my presentation by telling you that organizations can also use innovation as a strategy
to achieve (long-term) objectives. Such strategies may have implications for the boundaries of
organizations as some may engage into mergers, vertical integration and outsourcing. During my
presentation, I want to show you that the decision to engage into vertical integration mainly depends
on the degree of transaction costs involved and possibly other economic factors. Transaction costs
are also important for decisions to outsource certain services that are normally supplied within the
healthcare organization”.
Again, after a fierce discussion, the chairman welcomes the third speaker who is from the
Netherlands. She is an expert in organizational innovations.
Speaker 3: “Thank you. The previous speaker talked about vertical integration. However, this is just
one example of an organizational innovation. There are many other examples of integration
strategies (e.g. horizontal integration or patient-centered integration strategies) that healthcare
providers can use. Generally, for over 25 years now, healthcare systems have focused on improving
integration between organizations and levels of care. It is widely believed that the greater alignment
and synergy achieved through integration enhances quality of care, efficiency, and patient
satisfaction, as the previous speaker indicated. During my presentation I will give you an overview of
the evolution of – and shifts in – healthcare integration strategies over time. I will also show that not
all efforts to integrate healthcare delivery systems have been successful. Moreover, integration may
also raise adverse effects such as anticompetitive behavior or spending increases. Using economic
theories, I will also provide you with some explanations for this.

COVID-19 Task for Post-discussion
Please read the following news article and respond to the questions:
“COVID-19 exposes weak link for hospitals: outsourced cleaners”
https://www.newswise.com/coronavirus/covid-19-exposes-weak-link-for-hospitals-outsourced-
cleaners/?article_id=728581
Based on the article and the literature for this case, discuss
1.Why the cleaning staff might have been outsourced in the past
The cleaning staff might have been outsourced in the past because it was cheaper for hospitals (less
transaction costs).
2.What you consider the most optimal vertical arrangement of hospital cleaning staff

, The most optimal vertical arrangement of hospital cleaning staff is that a hospital takes a cleaning
company over (so there are less transaction costs).

Aims
- Role of innovations in firms
- Organizational innovations (e.g. horizontal and vertical integration)
- Transaction costs and decision to vertically integrate

Overview

From the viewpoint of economic theory, what role does innovation play in
(different types of) firms and what is the impact of innovations on the costs of
the firm?
Organizations, value chains, and institutions
Organization: a social entity which is goal-directed, is designed as a deliberately structured and
coordinated activity system, and is linked to the external environment (Daft, Murphy, & Willmott,
2014); a decision-making unit engaged in production (Hall, 1994); a system of interrelated behaviors
of people who are performing a task that has been differentiated into several distinct subsystems,
each subsystem performing a portion of the task, and the efforts to each being integrated to achieve
effective performance of the system (Lawrence & Lorsch, 1967) (e.g. Maastricht University)

Organizations have boundaries
Boundaries: the scope of activities in which the firm engages (Hall, 1994) (e.g. Maastricht University
does research, but no consulting; hospitals do short-term care, but no long-term care)

Organizations operate in a supply/value chain

- Most of the time there are multiple value chains in an organization

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