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Investment in hospital care technology under different purchasing rules: a real option approach

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  • Rossella Levaggi

    () (Università di Brescia)

  • Michele Moretto

    () (Università di Padova)

Abstract

Quality of health care is the product of several factors as the literature has long recognized. In this article we focus on the relationship between quality and investment in health technology by analysing the optimal investment decision in a new health care technology of a repre sentative 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 purchaser might in‡uence the quality level by setting a quality-contingent long-term contract with the hospital.The investment in new technology is in fact best incentivated within a long-term contract where the number of treatments reimbursed depends on the level of investment made 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 e¤ect on the decision to invest.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0046.

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Length: 36 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:pad:wpaper:0046

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

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  1. 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.
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  14. Rosella Levaggi & Michele Moretto & Vincenzo Rebba, 2009. "Investment decisions in hospital technology when physicians are devoted workers," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 18(5), pages 487-512.
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Citations

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Cited by:
  1. Lasserre, Pierre & Moatti, Jean-Paul & Soubeyran, Antoine, 2006. "Early initiation of highly active antiretroviral therapies for AIDS: Dynamic choice with endogenous and exogenous learning," Journal of Health Economics, Elsevier, vol. 25(3), pages 579-598, May.
  2. Laura Levaggi & Rosella Levaggi, 2010. "Strategic costs and preferences revelation in the allocation of resources for health care," International Journal of Health Care Finance and Economics, Springer, vol. 10(3), pages 239-256, September.
  3. 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.
  4. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2012. "DRGs: the link between investment in technologies and appropriateness," Working Papers 31/2012, University of Verona, Department of Economics.
  5. Rosella Levaggi & Michele Moretto & Vincenzo Rebba, 2009. "Investment decisions in hospital technology when physicians are devoted workers," Economics of Innovation and New Technology, Taylor and Francis Journals, vol. 18(5), pages 487-512.

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