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The regulation of health care providers’ payments when horizontal and vertical differentiation matter

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  • Bardey, David
  • Canta, Chiara
  • Lozachmeur, Jean-Marie

Abstract

This paper analyzes the regulation of payment schemes for health care providers competing in both quality and product differentiation of their services. The regulator uses two instruments: a prospective payment per patient and a cost reimbursement rate. When the regulator can only use a prospective payment, the optimal price involves a trade-off between the level of quality provision and the level of horizontal differentiation. If this pure prospective payment leads to underprovision of quality and overdifferentiation, a mixed reimbursement scheme allows the regulator to improve the allocation efficiency. This is true for a relatively low level of patients’ transportation costs. We also show that if the regulator cannot commit to the level of the cost reimbursement rate, the resulting allocation can dominate the one with full commitment. This occurs when the transportation cost is low or high enough, and the full commitment solution either implies full or zero cost reimbursement.

Suggested Citation

  • Bardey, David & Canta, Chiara & Lozachmeur, Jean-Marie, 2012. "The regulation of health care providers’ payments when horizontal and vertical differentiation matter," Journal of Health Economics, Elsevier, vol. 31(5), pages 691-704.
  • Handle: RePEc:eee:jhecon:v:31:y:2012:i:5:p:691-704
    DOI: 10.1016/j.jhealeco.2012.04.002
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    Cited by:

    1. Sorek Gilad, 2016. "Competition and Product Choice in Option Demand Markets," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 16(2), pages 785-805, April.
    2. Alexander Karpov, 2016. "Health care inequality, patient mobility and welfare," Economics Bulletin, AccessEcon, vol. 36(2), pages 1000-1009.
    3. Vomhof, Markus, 2016. "Hospital competition with heterogeneous patient groups: Incentives and regulation," Ruhr Economic Papers 624, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Sorek, Gilad, 2016. "Competition and consumer choice in option demand markets," Economics Letters, Elsevier, vol. 146(C), pages 13-16.
    5. Ricardo Gonçalves & Vasco Rodrigues & Hélder Vasconcelos, 2015. "Reference pricing in the presence of pseudo-generics," International Journal of Health Economics and Management, Springer, vol. 15(3), pages 281-305, September.
    6. Gilad Sorek, 2015. "Health Insurance and Competition in Health Care Markets," Auburn Economics Working Paper Series auwp2015-03, Department of Economics, Auburn University.

    More about this item

    Keywords

    Health care; Regulation; Mixed payment schemes; Horizontal and vertical differentiation;

    JEL classification:

    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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