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Investment In Hospital Care Technology Under Different Purchasing Rules: A Real Option Approach

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  • Rosella Levaggi
  • Moretto Michele

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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Article provided by Wiley Blackwell in its journal Bulletin of Economic Research.

Volume (Year): 60 (2008)
Issue (Month): 2 (04)
Pages: 159-181

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Handle: RePEc:bla:buecrs:v:60:y:2008:i:2:p:159-181
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Find related papers by JEL classification:
  • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
  • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

References listed on IDEAS
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  1. Pindyck, Robert, 1989. "Irreversibility, uncertainty, and investment," Policy Research Working Paper Series 294, The World Bank.
  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.
  3. Ching-to Albert Ma, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Papers 0047, Boston University - Industry Studies Programme.
  4. Chalkley, M. & Malcomson, J.M., 2001. "Cost Sharing in Health Service Provision: An Empirical Assessment of Cost Savings," Economics Series Working Papers 9969, University of Oxford, Department of Economics.
  5. 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.
  6. Gravelle, Hugh & Masiero, Giuliano, 2000. "Quality incentives in a regulated market with imperfect information and switching costs: capitation in general practice," Journal of Health Economics, Elsevier, vol. 19(6), pages 1067-1088, November.
  7. 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.
  8. Rosella Levaggi, 2007. "Regulating internal markets for hospital care," Journal of Regulatory Economics, Springer, vol. 32(2), pages 173-193, October.
  9. Andrew B. Abel & Avinash Dixit & Janice C. Eberly & Robert S. Pindyck, 1996. "Options, the Value of Capital, and Investment," The Quarterly Journal of Economics, MIT Press, vol. 111(3), pages 753-77, August.
  10. Levaggi, Rosella, 1999. " Optimal Procurement Contracts under a Binding Budget Constraint," Public Choice, Springer, vol. 101(1-2), pages 23-37, October.
  11. 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.
  12. 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.
  13. 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".
  14. 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.
  15. 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.
  16. 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.
  17. Martin Gaynor & William B. Vogt, 2003. "Competition Among Hospitals," NBER Working Papers 9471, National Bureau of Economic Research, Inc.
  18. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
  19. Elizabeth Docteur & Howard Oxley, 2003. "Health-Care Systems: Lessons from the Reform Experience," OECD Health Working Papers 9, OECD Publishing.
  20. Gary Biglaiser & Ching-to Albert Ma, 2000. "Price and Quality Competition under Adverse Selection: Market Organization and Efficiency," Papers 0102, Boston University - Industry Studies Programme.
  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.
  22. Baker, Laurence C., 2001. "Managed care and technology adoption in health care: evidence from magnetic resonance imaging," Journal of Health Economics, Elsevier, vol. 20(3), pages 395-421, May.
  23. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
  24. Rosella LEVAGGI & Lise ROCHAIX, 2007. "Exit, Choice Or Loyalty: Patient Driven Competition In Primary Care," Annals of Public and Cooperative Economics, Wiley Blackwell, vol. 78(4), pages 501-535, December.
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Cited by:

  1. 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.
  2. Pierre Lasserre & Jean-Paul Moatti & Antoine Soubeyran, 2005. "Early Initiation of Highly Active Antiretroviral Therapies for Aids: Dynamic choice with Endogenous and Exogenous Learning," CIRANO Working Papers 2005s-34, CIRANO.
  3. Levaggi, Rosella & Moretto, Michele & Pertile, Paolo, 2014. "Two-part payments for the reimbursement of investments in health technologies," Health Policy, Elsevier, vol. 115(2), pages 230-236.
  4. Rosella Levaggi & Michele Moretto & Vincenzo Rebba, 2009. "Investment decisions in hospital technology when physicians are devoted workers," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 18(5), pages 487-512.
  5. 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.
  6. 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.
  7. Finocchiaro Castro, Massimo & Guccio, Calogero & Pignataro, Giacomo & Rizzo, Ilde, 2014. "The effects of reimbursement mechanisms on medical technology diffusion in the hospital sector in the Italian NHS," Health Policy, Elsevier, vol. 115(2), pages 215-229.

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