The Internet and Vertical Integration: the Case of Hospital Radiology Services

Abstract: Over the years, an extensive empirical literature has been developed to address theoretical propositions concerning vertical integration of a business enterprise (particularly, the "Coase-Williamson" framework). To operationalize the dependent variable, a number of works in this area employed a vertical integration index, which measures the fraction of economic activities carried out "in house". Despite this large body of knowledge, there were few, if any, coherent attempts to apply it in order to formally test a much-publicized notion that the adoption and use of the Internet throughout the business sector disintegrates well-established corporate hierarchies. To bridge this gap, this study focuses on diagnostic radiology services provided by U.S. hospitals to their patients to analyze whether the hospitals’ capability to transmit images over the Internet to remote parties for interpretation or consultation (known as "Internet-based teleradiology") transforms the traditional hierarchical arrangement characterizing hospital radiology practices. The vertical integration index was calculated using Medicare Part B claims data. The estimation of a set of linear and logistic regression models shows that the hospitals’ involvement with Internet-based teleradiology has a positive and statistically significant effect on the volume of interpretations provided using contractual arrangements with off-site radiology practices relative to that provided using the "in-house" radiologists.