Medicare policies in a two-Tier healthcare system with overtreatment

To alleviate the problem in two-tier healthcare systems in which city hospitals are overutilized while community hospitals are underutilized, some countries (e.g., China) exploit the induction effect of medicare policy and adopt a differentiated medicare policy (DMP) instead of an undifferentiated medicare policy (UDMP). The difference between the two policies lies in the fact that DMP provides no or low reimbursement for patients who directly seek care from city hospitals, while UDMP reimburses all patients at the same rate. However, some countries (e.g., Austria and Japan) have different attitudes toward this approach. To explore the causes of this variation, we examine the impact of medicare policies on service operations in a two-tier healthcare system in which a city hospital can provide services for all kinds of patients but will likely overtreat mildly ill patients, while a community hospital focuses on treating mild illness and refers severely ill patients to a city hospital. Our results indicate that DMP does not always benefit the community hospital and can benefit the city hospital in some cases, which goes against public expectations. Furthermore, DMP may have a counterproductive effect in reducing patient waiting times, but it can outperform UDMP in terms of patient utility and social welfare, even though DMP may cause some patients to suffer financial losses. Interestingly, we find Pareto zones that can yield multi-win outcomes when UDMP is adopted, but these Pareto zones narrow as the reimbursement rate increases.