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Hospital competition with soft budgets

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  • Brekke, Kurt Richard
  • Siciliani, Luigi
  • Straume, Odd Rune

Abstract

We study the incentives for hospitals to provide quality and expend cost-reducing effoort when their budgets are soft, i.e., the payer may cover deficits or confiscate surpluses. The basic set up is a Hotelling model with two hospitals that differ in location and face demand uncertainty, where the hospitals run deficits (surpluses) in the high (low) demand state. Softer budgets reduce cost efficiency, while the effect on quality is ambiguous. For given cost efficiency, softer budgets increase quality since parts of the expenditures may be covered by the payer. However, softer budgets reduce cost-reducing effort and the profit margin, which in turn weakens quality incentives. We also find that profit confiscation reduces quality and cost-reducing effort. First best is achieved by a strict no-bailout and no-profit-confiscation policy when the regulated price is optimally set. However, for suboptimal prices a more lenient bailout policy can be welfare improving. When we allow for heterogeneity in costs and qualities, we also show that a softer budget can raise quality for high-cost patients (and therefore reduce 'skimping' on such patients).

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 9302.

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Date of creation: Jan 2013
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Handle: RePEc:cpr:ceprdp:9302

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Keywords: Cost efficiency; Hospital competition; Quality; Soft budgets;

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References

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  1. Kornai, Janos, 2001. "Hardening the budget constraint: The experience of the post-socialist countries," European Economic Review, Elsevier, vol. 45(9), pages 1573-1599, October.
  2. Odd Rune Straume & Kurt Brekke & Robert Nuscheler, 2004. "Gatekeeping In Health Care," Royal Economic Society Annual Conference 2004 83, Royal Economic Society.
  3. Brekke, Kurt R. & Nuscheler, Robert & Straume, Odd Rune, 2002. "Quality and location choices under price regulation," Working Papers in Economics 24/02, University of Bergen, Department of Economics.
  4. Brekke, Kurt Richard & Siciliani, Luigi & Straume, Odd Rune, 2007. "Competition and Waiting Times in Hospital Markets," CEPR Discussion Papers 6285, C.E.P.R. Discussion Papers.
  5. Eggleston, Karen, 2008. "Soft budget constraints and the property rights theory of ownership," Economics Letters, Elsevier, vol. 100(3), pages 425-427, September.
  6. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2009. "Hospital Competition and Quality with Regulated Prices," CESifo Working Paper Series 2635, CESifo Group Munich.
  7. Siciliani, Luigi & Stanciole, Anderson & Jacobs, Rowena, 2009. "Do waiting times reduce hospital costs?," Journal of Health Economics, Elsevier, vol. 28(4), pages 771-780, July.
  8. Mark Duggan, 2000. "Hospital Ownership and Public Medical Spending," NBER Working Papers 7789, National Bureau of Economic Research, Inc.
  9. Yu-Chu Shen & Karen Eggleston, 2008. "The Effect of Soft Budget Constraints on Access and Quality in Hospital Care," NBER Working Papers 14256, National Bureau of Economic Research, Inc.
  10. János Kornai, 2009. "The soft budget constraint syndrome in the hospital sector," International Journal of Health Care Finance and Economics, Springer, vol. 9(2), pages 117-135, June.
  11. J�nos Kornai & Eric Maskin & G�rard Roland, 2003. "Understanding the Soft Budget Constraint," Journal of Economic Literature, American Economic Association, vol. 41(4), pages 1095-1136, December.
  12. Eggleston, Karen & Shen, Yu-Chu, 2011. "Soft budget constraints and ownership: Empirical evidence from US hospitals," Economics Letters, Elsevier, vol. 110(1), pages 7-11, January.
  13. Beitia, Arantza, 2003. "Hospital quality choice and market structure in a regulated duopoly," Journal of Health Economics, Elsevier, vol. 22(6), pages 1011-1036, November.
  14. Hagen, Terje P. & Kaarboe, Oddvar M., 2006. "The Norwegian hospital reform of 2002: Central government takes over ownership of public hospitals," Health Policy, Elsevier, vol. 76(3), pages 320-333, May.
  15. Oliver Hart & Andrei Shleifer & Robert Vishny, 1996. "The Proper Scope of Government: Theory and an Application to Prisons," Harvard Institute of Economic Research Working Papers 1778, Harvard - Institute of Economic Research.
  16. Ellis, Randall P., 1998. "Creaming, skimping and dumping: provider competition on the intensive and extensive margins1," Journal of Health Economics, Elsevier, vol. 17(5), pages 537-555, October.
  17. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2012. "Quality competition with profit constraints," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 642-659.
  18. Hughes, David & McGuire, Alistair, 2003. "Stochastic demand, production responses and hospital costs," Journal of Health Economics, Elsevier, vol. 22(6), pages 999-1010, November.
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Cited by:
  1. Kornai, János, 2014. "Bevezetés A puha költségvetési korlát című kötethez
    [Introduction to the author s volume entitled Soft Budget Constraint]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.

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