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The impact of liability for malpractice on the optimal reimbursement schemes for health services

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  • Sonja Ossig
  • Eberhard Feess

Abstract

We analyze the impact of liability risks for malpractice on the optimal reimbursement schemes for hospitals. In our model, the hospital decides upon two unobservable efforts, a cost reduction effort and a quality improvement effort. We assume that the total effort is positive even without monetary incentives due to some intrinsic motivation, but that motivation is biased towards quality. In our basic model without liability risks, we then find that either a fee-for-service system (FFS) or a fixed-fee prospective payment system (PPS) is optimal, but mixed systems are strictly inferior. With liability risks, mixed systems are in general optimal, and the variable part of costs that should be borne by the hospital is increasing in the degree of the liability risk. This may at least partially explain why countries like Germany where liability risks are low compared to the US have been more reluctant in switching from FFS to PPS

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Bibliographic Info

Paper provided by Econometric Society in its series Econometric Society 2004 Far Eastern Meetings with number 396.

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Date of creation: 11 Aug 2004
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Handle: RePEc:ecm:feam04:396

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Keywords: principal-agent-theory; multi-task; health care; hospital compensation schemes; liability law;

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  1. Ching-to Albert Ma, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Papers 0047, Boston University - Industry Studies Programme.
  2. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," Journal of Law, Economics and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
  3. 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.
  4. 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.
  5. Randall P. Ellis & Thomas G. McGuire, 1994. "Hospital Response to Prospective Payment: Moral Hazard, Selection, and Practice-Style Effects," Papers 0050, Boston University - Industry Studies Programme.
  6. Ching-to Albert Ma, 1997. "Cost and Quality Incentives in Health Care: Altruistic Providers," Papers 0084, Boston University - Industry Studies Programme.
  7. Allen, Robin & Gertler, Paul J, 1991. "Regulation and the Provision of Quality to Heterogenous Consumers: The Case of Prospective Pricing of Medical Services," Journal of Regulatory Economics, Springer, vol. 3(4), pages 361-75, December.
  8. 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.
  9. Ellis, Randall P. & McGuire, Thomas G., 1988. "Insurance principles and the design of prospective payment systems," Journal of Health Economics, Elsevier, vol. 7(3), pages 215-237, September.
  10. 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.
  11. Gal-Or, Esther, 1999. "Optimal Reimbursement and Malpractice Sharing Rules in Health Care Markets," Journal of Regulatory Economics, Springer, vol. 16(3), pages 237-65, November.
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