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Investment decisions in hospital technology when physicians are devoted workers

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Author Info

  • Rossella Levaggi

    ()
    (Università di Brescia)

  • Michele Moretto

    ()
    (Università di Padova)

  • Vincenzo Rebba

    ()
    (Università di Padova)

Abstract

This paper analyses the decision to invest in a new technology (as a way to increase quality) by a hospital using a real option framework. The environment is characterised by uncertainty on costs and returns of such investment and by the assumption that physicians are 'devoted workers'. We model the behaviour of three main actors: an agency purchasing hospital care (purchaser), a hospital (provider) and a representative hospital physician. The purchaser rewards the hospital at a fixed price for each patient treated and sets a quality-contingent long-term contract with the hospital according to a purchasing rule. First, we show that the presence of devoted physicians allows the hospital to reduce its investment while increasing the level of quality of care provided. We then analyse how the purchaser may influence the timing of the hospital's investment and the quality of care through strategic setting of the purchasing rule parameters. In particular, we show that if the purchaser aims at maximising overall quality of hospital care when physicians are devoted workers, it is not optimal to set a purchasing rule that cancels out the value of the option to defer the hospital's investment.

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Bibliographic Info

Paper provided by Dipartimento di Scienze Economiche "Marco Fanno" in its series "Marco Fanno" Working Papers with number 0048.

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Length: 38 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:pad:wpaper:0048

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Keywords: Hospital Technology; Devoted worker; Quality; Irreversible investment; Real options.;

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References

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  1. Rossella Levaggi & Michele Moretto, 2007. "Investment in hospital care technology under different purchasing rules: a real option approach," "Marco Fanno" Working Papers, Dipartimento di Scienze Economiche "Marco Fanno" 0046, Dipartimento di Scienze Economiche "Marco Fanno".
  2. Ellis, Randall P. & McGuire, Thomas G., 1986. "Provider behavior under prospective reimbursement : Cost sharing and supply," Journal of Health Economics, Elsevier, Elsevier, vol. 5(2), pages 129-151, June.
  3. Propper, Carol & Burgess, Simon & Green, Katherine, 2004. "Does competition between hospitals improve the quality of care?: Hospital death rates and the NHS internal market," Journal of Public Economics, Elsevier, Elsevier, vol. 88(7-8), pages 1247-1272, July.
  4. Bos, Dieter & De Fraja, Gianni, 2002. "Quality and outside capacity in the provision of health services," Journal of Public Economics, Elsevier, Elsevier, vol. 84(2), pages 199-218, May.
  5. Patrick Francois, 2002. "Not-for-profit Provision of Public Services," The Centre for Market and Public Organisation, Department of Economics, University of Bristol, UK 02/060, Department of Economics, University of Bristol, UK.
  6. 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.
  7. 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, Wharton School Rodney L. White Center for Financial Research 15-95, Wharton School Rodney L. White Center for Financial Research.
  8. Rowena Jacobs & Maria Goddard & Peter C Smith, 2006. "Public services: are composite measures a robust reflection of performance in the public sector?," Working Papers, Centre for Health Economics, University of York 016cherp, Centre for Health Economics, University of York.
  9. Chalkley, M. & Malcomson, J.M., 1995. "Contracting for health services with unmonitored quality," Discussion Paper Series In Economics And Econometrics 9510, Economics Division, School of Social Sciences, University of Southampton.
  10. Ma, Ching-to Albert, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, Wiley Blackwell, vol. 3(1), pages 93-112, Spring.
  11. Palmer, Stephen & Smith, Peter C., 2000. "Incorporating option values into the economic evaluation of health care technologies," Journal of Health Economics, Elsevier, Elsevier, vol. 19(5), pages 755-766, September.
  12. Glazer, Amihai, 2004. "Motivating devoted workers," International Journal of Industrial Organization, Elsevier, Elsevier, vol. 22(3), pages 427-440, March.
  13. Campbell, S. M. & Roland, M. O. & Buetow, S. A., 2000. "Defining quality of care," Social Science & Medicine, Elsevier, Elsevier, vol. 51(11), pages 1611-1625, December.
  14. Francois, Patrick, 2000. "'Public service motivation' as an argument for government provision," Journal of Public Economics, Elsevier, Elsevier, vol. 78(3), pages 275-299, November.
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Citations

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Cited by:
  1. Michele Moretto & Rosella Levaggi, 2004. "Investment in Hospital Care Technology under Different Purchasing Rules: A Real Option Approach," Working Papers, Fondazione Eni Enrico Mattei 2004.75, Fondazione Eni Enrico Mattei.
  2. Levaggi, R. & Moretto, M. & Pertile, P., 2012. "Static and dynamic efficiency of irreversible health care investments under alternative payment rules," Journal of Health Economics, Elsevier, Elsevier, vol. 31(1), pages 169-179.

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