We present a model of contracting between a purchaser of health services and a provider (a hospital). We assume that hospitals provide two alternative treatments for a given diagnosis: a less intensive one (for example a medical treatment) and a more intensive one (surgical treatment). We assume that prices are set equal to the average cost reported by the providers, as observed in many OECD countries (yardstick competition). The purchaser has two options: 1) to set one tariff based on the diagnosis only; 2) to differentiate the tariff between the surgical and the medical treatment (i.e.to refine the tariff). We show that when tariffs are refined, the provider has always an incentive to overprovide the surgical treatment. If the tariff is not refined, the hospital underprovides the surgical treatment (and overprovides the medical treatment) if the degree of altruism is sufficiently low compared the opportunity cost of public funds. Our main result is that price refinement might not be optimal.
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Paper provided by Department of Economics, University of York in its series Discussion Papers with number
08/29.
Length: Date of creation: Oct 2008 Date of revision: Handle: RePEc:yor:yorken:08/29
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Find related papers by JEL classification: H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
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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.:
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.
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