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Supplier Discretion over Provision: Theory and an Application to Medical Care

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  • James Malcomson

Abstract

Suppliers who are better informed than purchasers, such as physicians treating insured patients, often have discretion over what to provide. This paper shows how, when the purchaser observes what is supplied but can observe neither recipient type nor the actual cost incurred, optimal provision differs from what would be efficient if the purchaser had full information, whether or not the supplier can extract informational rent. The analysis is applied to, among other things, data on tests for coronary artery disease and to Medicare diagnosis-related groups defined by the treatment given, not just the diagnosis, illustrating the biases in provision that result.

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File URL: http://www.cesifo-group.de/portal/page/portal/DocBase_Content/WP/WP-CESifo_Working_Papers/wp-cesifo-2005/wp-cesifo-2005-02/cesifo1_wp1407.pdf
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Bibliographic Info

Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 1407.

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Date of creation: 2005
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Handle: RePEc:ces:ceswps:_1407

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Keywords: supplier discretion; procurement; public provision; diagnosis-related groups; medicare; prospective payment; cost-effectiveness;

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References

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  1. Chalkley, Martin & Malcomson, James M., 2002. "Cost sharing in health service provision: an empirical assessment of cost savings," Journal of Public Economics, Elsevier, vol. 84(2), pages 219-249, May.
  2. McGuire, Thomas G., 2000. "Physician agency," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 9, pages 461-536 Elsevier.
  3. Guesnerie,Roger, 1998. "A Contribution to the Pure Theory of Taxation," Cambridge Books, Cambridge University Press, number 9780521629560, October.
  4. Chalkley, Martin & Malcomson, James M., 2000. "Government purchasing of health services," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 15, pages 847-890 Elsevier.
  5. Mark B. McClellan, 1996. "Medicare Reimbursement and Hospital Cost Growth," NBER Chapters, in: Advances in the Economics of Aging, pages 149-190 National Bureau of Economic Research, Inc.
  6. Armstrong, Mark & Sappington, David E.M., 2007. "Recent Developments in the Theory of Regulation," Handbook of Industrial Organization, Elsevier.
  7. Randall P. Ellis & Thomas G. McGuire, 1993. "Supply-Side and Demand-Side Cost Sharing in Health Care," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 135-151, Fall.
  8. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
  9. Siciliani, Luigi, 2006. "Selection of treatment under prospective payment systems in the hospital sector," Journal of Health Economics, Elsevier, vol. 25(3), pages 479-499, May.
  10. Mark McClellan, 1997. "Hospital Reimbursement Incentives: An Empirical Analysis," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 91-128, 03.
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Cited by:
  1. Philippe Choné & Stéphane Gauthier, 2014. "Optimal Rationing within a Heterogeneous Population," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00983063, HAL.
  2. Ting Liu & Ching-to Albert Ma, 2012. "Health Insurance, Treatment Plan, and Delegation to Altruistic Physician," Department of Economics Working Papers 12-08, Stony Brook University, Department of Economics.
  3. Luigi Siciliani & Elín J. G. Hafsteinsdóttir, 2008. "DRG prospective payment system: refine or not refine?," Discussion Papers 08/29, Department of Economics, University of York.
  4. Siciliani, Luigi, 2006. "Selection of treatment under prospective payment systems in the hospital sector," Journal of Health Economics, Elsevier, vol. 25(3), pages 479-499, May.
  5. Miller, Nolan H., 2006. "Insurer-provider integration, credible commitment, and managed-care backlash," Journal of Health Economics, Elsevier, vol. 25(5), pages 861-876, September.

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