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Choice of Treatment Intensities by a Nonprofit Hospital Under Prospective Pricing

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  • William P. Rogerson
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    Abstract

    Under prospective pricing, payers for health care essentially use price regulation of hospitals as a way of indirectly regulating the provision of treatment intensity. This paper ppresents a theory of how a nonprofit hospital selects treatment intensities for its priducts given the payer's choice of prices and then determines how the payer should select prices in light of this theory. The main result is that, in quilibrium, the ration of price to marginal cost will vary across products inversely with the elasticity of demand with respect to treatment intensity. This means that, generally, the hospital will earn positive(negative) accounting profit on products with low(high) intensity elasticities of demand.

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    File URL: http://www.kellogg.northwestern.edu/research/math/papers/1069.pdf
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    Paper provided by Northwestern University, Center for Mathematical Studies in Economics and Management Science in its series Discussion Papers with number 1069.

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    Date of creation: Oct 1993
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    Handle: RePEc:nwu:cmsems:1069

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    1. Rogerson, William P, 1990. "Quality vs. Quantity in Military Procurement," American Economic Review, American Economic Association, vol. 80(1), pages 83-92, March.
    2. Ching-to Albert Ma & Thomas G. McGuire, 1992. "Paying for Joint Costs in Health Care," Papers 0023, Boston University - Industry Studies Programme.
    3. Glazer, Jacob & Glazer, Jacob & McGuire, Thomas G., 1993. "Should physicians be permitted to 'balance bill' patients?," Journal of Health Economics, Elsevier, vol. 12(3), pages 239-258, October.
    4. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
    5. Friedman, Bernard & Pauly, Mark, 1981. "Cost Functions for a Service Firm with Variable Quality and Stochastic Demand: The Case of Hospitals," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 620-24, November.
    6. Jeffrey E. Harris, 1979. "Pricing Rules for Hospitals," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 224-243, Spring.
    7. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, December.
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