ABSTRACT
This chapter looks at the degree of vertical integration of primary care and acute care providers. Primary care activities have three main roles: treatment provided, referrals to hospitals, and prevention activities. These three activities are interdependent and efficiency efforts and incentives at the primary care level influence performance in all of them. In turn, this interdependence generates an externality on hospitals in terms of their effort to increase efficiency. This externality may lead to sub-optimal decisions from a social perspective, which may or may not be solved with appropriate payment mechanisms.
