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Investment in Hospital Care Technology under Different Purchasing Rules: A Real Option Approach

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Author Info
Michele Moretto (Dipartimento di Scienze Economiche, University of Brescia)
Rosella Levaggi (Dipartimento di Scienze Economiche, University of Brescia)

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Abstract

In this article, we analyse the optimal investment decision in a new health care technology of a representative hospital that maximises its surplus in an uncertain environment. The new technology allows the hospital to increase the quality level of the care provided, but the investment is irreversible. The article uses the framework of the real option literature to show how the purchasing rules might influence the level of investment. We show that the investment in new technology is best incentivate within a long term contract where the number of treatments reimbursed depends on the level of investment made in the period when the technology is new. In this way, asymmetry of information does not affect the outcome of the contract. In our model in fact the purchaser can verify the level of the investment only at the end of each period but the purchasing rule has an anticipating effect on the decision to invest.

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Publisher Info
Paper provided by Fondazione Eni Enrico Mattei in its series Working Papers with number 2004.75.

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Date of creation: Apr 2004
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Handle: RePEc:fem:femwpa:2004.75

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Related research
Keywords: Health care technologies; Medical quality; Irreversible investments; Real options;

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Find related papers by JEL classification:
I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
D18 - Microeconomics - - Household Behavior - - - Consumer Protection

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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.:
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    Other versions:
  2. Ching-to Albert Ma, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Papers 0047, Boston University - Industry Studies Programme.
    Other versions:
  3. Elizabeth Docteur & Howard Oxley, 2003. "Health-Care Systems: Lessons from the Reform Experience," OECD Economics Department Working Papers 374, OECD, Economics Department. [Downloadable!]
    Other versions:
  4. Rosella LEVAGGI & Lise ROCHAIX, 2007. "Exit, Choice Or Loyalty: Patient Driven Competition In Primary Care," Annals of Public and Cooperative Economics, Blackwell Publishing, vol. 78(4), pages 501-535, December. [Downloadable!] (restricted)
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  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. [Downloadable!] (restricted)
  7. Dixit, Avinash, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-32, Winter. [Downloadable!] (restricted)
  8. Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, . "Options, the Value of Capital, and Investment," Rodney L. White Center for Financial Research Working Papers 15-95, Wharton School Rodney L. White Center for Financial Research.
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  9. Daniel P. Kessler & Mark B. McClellan, 2000. "Is Hospital Competition Socially Wasteful?," The Quarterly Journal of Economics, MIT Press, vol. 115(2), pages 577-615, May. [Downloadable!] (restricted)
  10. Rossella Levaggi & Michele Moretto & Vincenzo Rebba, 2007. "Investment decisions in hospital technology when physicians are devoted workers," "Marco Fanno" Working Papers 0048, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
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  11. Levaggi, Rosella, 1999. " Optimal Procurement Contracts under a Binding Budget Constraint," Public Choice, Springer, vol. 101(1-2), pages 23-37, October. [Downloadable!] (restricted)
  12. Laurence C. Baker & Ciaran S. Phibbs, 2002. "Managed Care, Technology Adoption, and Health Care: The Adoption of Neonatal Intensive Care," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 524-548, Autumn.
  13. Rosella Levaggi, 2005. "Hospital Health Care: Pricing and Quality Control in a Spatial Model with Asymmetry of Information," International Journal of Health Care Finance and Economics, Springer, vol. 5(4), pages 327-349, December. [Downloadable!] (restricted)
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  15. 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. [Downloadable!] (restricted)
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  16. Rosella Levaggi, 2007. "Regulating internal markets for hospital care," Journal of Regulatory Economics, Springer, vol. 32(2), pages 173-193, October. [Downloadable!] (restricted)
  17. 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. [Downloadable!] (restricted)
  18. 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.
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  19. 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. [Downloadable!] (restricted)
  20. Sloan, Frank A. & Picone, Gabriel A. & Taylor, Donald H., Jr. & Chou, Shin-Yi, 2000. "Hospital Ownership and Cost and Quality of Care: Is There a Dime's Worth of Difference?," Working Papers 00-11, Duke University, Department of Economics. [Downloadable!]
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  21. Bergstrom, Theodore & Blume, Lawrence & Varian, Hal, 1986. "On the private provision of public goods," Journal of Public Economics, Elsevier, vol. 29(1), pages 25-49, February. [Downloadable!] (restricted)
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  22. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Rossella Levaggi & Michele Moretto & Vincenzo Rebba, 2007. "Investment decisions in hospital technology when physicians are devoted workers," "Marco Fanno" Working Papers 0048, Dipartimento di Scienze Economiche "Marco Fanno". [Downloadable!]
    Other versions:
  2. Rosella Levaggi, 2005. "Hospital Health Care: Pricing and Quality Control in a Spatial Model with Asymmetry of Information," International Journal of Health Care Finance and Economics, Springer, vol. 5(4), pages 327-349, December. [Downloadable!] (restricted)
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