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Investment decisions in hospital technology when physicians are devoted workers

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  • Rosella Levaggi
  • Michele Moretto
  • Vincenzo Rebba

Abstract

This paper analyses the decision to invest in a new technology (as a way to increase quality) by a hospital using a real option framework. The environment is characterised by uncertainty on costs and returns of such investment and by the assumption that physicians are 'devoted workers'. We model the behaviour of three main actors: an agency purchasing hospital care (purchaser), a hospital (provider) and a representative hospital physician. The purchaser rewards the hospital at a fixed price for each patient treated and sets a quality-contingent long-term contract with the hospital according to a purchasing rule. First, we show that the presence of devoted physicians allows the hospital to reduce its investment while increasing the level of quality of care provided. We then analyse how the purchaser may influence the timing of the hospital's investment and the quality of care through strategic setting of the purchasing rule parameters. In particular, we show that if the purchaser aims at maximising overall quality of hospital care when physicians are devoted workers, it is not optimal to set a purchasing rule that cancels out the value of the option to defer the hospital's investment.

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File URL: http://www.tandfonline.com/doi/abs/10.1080/10438590802547209
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Bibliographic Info

Article provided by Taylor & Francis Journals in its journal Economics of Innovation and New Technology.

Volume (Year): 18 (2009)
Issue (Month): 5 ()
Pages: 487-512

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Handle: RePEc:taf:ecinnt:v:18:y:2009:i:5:p:487-512

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Web page: http://www.tandfonline.com/GEIN20

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Web: http://www.tandfonline.com/pricing/journal/GEIN20

Related research

Keywords: Hospital technology; devoted worker; quality; irreversible investment; real options;

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References

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  1. Glazer, Amihai, 2004. "Motivating devoted workers," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 427-440, March.
  2. Campbell, S. M. & Roland, M. O. & Buetow, S. A., 2000. "Defining quality of care," Social Science & Medicine, Elsevier, vol. 51(11), pages 1611-1625, December.
  3. Rosella Levaggi & Moretto Michele, 2008. "Investment In Hospital Care Technology Under Different Purchasing Rules: A Real Option Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 60(2), pages 159-181, 04.
  4. Patrick Francois, 2003. "Not-For-Profit Provision of Public Services," Economic Journal, Royal Economic Society, vol. 113(486), pages C53-C61, March.
  5. Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," NBER Working Papers 5227, National Bureau of Economic Research, Inc.
  6. Palmer, Stephen & Smith, Peter C., 2000. "Incorporating option values into the economic evaluation of health care technologies," Journal of Health Economics, Elsevier, vol. 19(5), pages 755-766, September.
  7. Chalkley, M. & Malcomson, J.M., 1998. "Government purchasing of health services," Discussion Paper Series In Economics And Econometrics 9821, Economics Division, School of Social Sciences, University of Southampton.
  8. Chalkley, Martin & Malcomson, James M, 1998. "Contracting for Health Services with Unmonitored Quality," Economic Journal, Royal Economic Society, vol. 108(449), pages 1093-1110, July.
  9. Bos, Dieter & De Fraja, Gianni, 2002. "Quality and outside capacity in the provision of health services," Journal of Public Economics, Elsevier, vol. 84(2), pages 199-218, May.
  10. Francois, Patrick, 2000. "'Public service motivation' as an argument for government provision," Journal of Public Economics, Elsevier, vol. 78(3), pages 275-299, November.
  11. Rowena Jacobs & Maria Goddard & Peter C Smith, 2006. "Public services: are composite measures a robust reflection of performance in the public sector?," Working Papers 016cherp, Centre for Health Economics, University of York.
  12. Propper, Carol & Burgess, Simon & Green, Katherine, 2004. "Does competition between hospitals improve the quality of care?: Hospital death rates and the NHS internal market," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1247-1272, July.
  13. Ma, Ching-to Albert, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 93-112, Spring.
  14. Ellis, Randall P. & McGuire, Thomas G., 1986. "Provider behavior under prospective reimbursement : Cost sharing and supply," Journal of Health Economics, Elsevier, vol. 5(2), pages 129-151, June.
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Cited by:
  1. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2010. "Static and Dynamic Efficiency of Irreversible Health Care Investments under Alternative Payment Rules," Working Papers 2010.130, Fondazione Eni Enrico Mattei.
  2. Rosella Levaggi & Moretto Michele, 2008. "Investment In Hospital Care Technology Under Different Purchasing Rules: A Real Option Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 60(2), pages 159-181, 04.

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