We present a model of optimal contracting between a purchaser and a provider of health services. We assume that providers can increase demand by increasing quality but can also inflate activity through a manipulative effort (upcoding or DRG creep). We derive and compare the optimal price and audit policy for the purchaser under two scenarios: a) the purchaser can commit to a given audit policy (commitment); b) the purchaser cannot commit to a given audit policy (no commitment). If reported output is additive in quality and manipulation, we find that, if price is exogenously determined, the frequency of an audit is higher under the 'commitment' scenario than under the 'no commitment' one; also, under 'commitment', the degree of manipulation, quality and reported output are higher. If price is endogenous (i.e. it can be optimally chosen by the purchaser), then price is higher under 'no commitment' while the optimal audit policy, the equilibrium quality, manipulation and purchaser's net benefit are identical. If reported output is multiplicative in manipulation and quality, the purchaser sets a higher price under 'no commitment'. Nevertheless, quality and manipulation remain at lower levels, whereas auditing is more intensive than under commitment. The inability to commit now reduces the purchaser's net benefit.
Download Info
To download:
If you experience problems downloading a file, check if you have the
proper application to
view it first. Information about this may be contained
in the File-Format links below. In case of further problems read
the IDEAS help
page. Note that these files are not on the IDEAS
site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Publisher Info
Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number
6689.
Find related papers by JEL classification: D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation
This paper has been announced in the following NEP Reports:
References listed on IDEAS Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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.
[Downloadable!] (restricted)
Other versions: