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Hospital Health Care: Pricing and Quality Control in a Spatial Model with Asymmetry of Information

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  • Rosella Levaggi

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Abstract

The cost of hospital care depends on the quality of the service, on the personal characteristics of the patient, on the effort of the medical staff and on information asymmetry. In this article the cost minimizing properties of alternative payment systems will be discussed in a context where hospitals can observe patient severity and compete according to the rules of Hotelling's spatial competition. The scheme is designed from the standpoint of a purchaser that sets up a contract with several providers for services of a given quality at the least possible cost. Patients' severity cannot be observed and quality cannot be verified, but the latter can be inferred through the choice of patients. The model shows that in the health care market, prospective payments and yardstick competition are weak instruments for cost containment; incentive compatible schemes are, at least from a theoretical point of view, better instruments especially in a context where the purchaser can use signals relating to the variables it cannot observe. Cost inflation has two components: the information rent paid to the provider and inefficiency. In our model the information rent is used by the provider to get more patients to his hospital; spatial competition can then be used to curb the cost of providing hospital care. Copyright Springer Science + Business Media, Inc. 2005

Suggested Citation

  • Rosella Levaggi, 2005. "Hospital Health Care: Pricing and Quality Control in a Spatial Model with Asymmetry of Information," International Journal of Health Economics and Management, Springer, vol. 5(4), pages 327-349, December.
  • Handle: RePEc:kap:ijhcfe:v:5:y:2005:i:4:p:327-349
    DOI: 10.1007/s10754-005-3800-1
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    References listed on IDEAS

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    1. Rosella Levaggi & Moretto Michele, 2008. "Investment In Hospital Care Technology Under Different Purchasing Rules: A Real Option Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 60(2), pages 159-181, April.
    2. Biglaiser, Gary & Ma, Ching-to Albert, 2003. " Price and Quality Competition under Adverse Selection: Market Organization and Efficiency," RAND Journal of Economics, The RAND Corporation, vol. 34(2), pages 266-286, Summer.
    3. 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.
    4. Chalkley, Martin & Malcomson, James M, 1998. "Contracting for Health Services with Unmonitored Quality," Economic Journal, Royal Economic Society, vol. 108(449), pages 1093-1110, July.
    5. Daniel P. Kessler & Mark B. McClellan, 2000. "Is Hospital Competition Socially Wasteful?," The Quarterly Journal of Economics, Oxford University Press, vol. 115(2), pages 577-615.
    6. Gaynor, Martin & Vogt, William B, 2003. " Competition among Hospitals," RAND Journal of Economics, The RAND Corporation, vol. 34(4), pages 764-785, Winter.
    7. Chalkley, Martin & Malcomson, James M., 2002. "Cost sharing in health service provision: an empirical assessment of cost savings," Journal of Public Economics, Elsevier, vol. 84(2), pages 219-249, May.
    8. Salmon, Pierre, 1987. "Decentralisation as an Incentive Scheme," Oxford Review of Economic Policy, Oxford University Press, vol. 3(2), pages 24-43, Summer.
    9. 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.
    10. 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.
    11. Gravelle, Hugh, 1999. "Capitation contracts: access and quality," Journal of Health Economics, Elsevier, vol. 18(3), pages 315-340, June.
    12. Levaggi, Rosella & Montefiori, Marcello, 2005. "It takes three to tango: Soft budget constraint and cream skimming in the hospital care market," POLIS Working Papers 48, Institute of Public Policy and Public Choice - POLIS.
    13. Levaggi, Rosella, 1999. "Optimal Procurement Contracts under a Binding Budget Constraint," Public Choice, Springer, vol. 101(1-2), pages 23-37, October.
    14. Dranove, David, 1988. "Demand Inducement and the Physician/Patient Relationship," Economic Inquiry, Western Economic Association International, vol. 26(2), pages 281-298, April.
    15. Sappington, David, 1983. "Limited liability contracts between principal and agent," Journal of Economic Theory, Elsevier, vol. 29(1), pages 1-21, February.
    16. Joseph P. Newhouse, 1996. "Reimbursing Health Plans and Health Providers: Efficiency in Production versus Selection," Journal of Economic Literature, American Economic Association, vol. 34(3), pages 1236-1263, September.
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    Cited by:

    1. Rosella Levaggi & Marcello Montefiori, 2013. "Patient selection in a mixed oligopoly market for health care: the role of the soft budget constraint," International Review of Economics, Springer;Happiness Economics and Interpersonal Relations (HEIRS), vol. 60(1), pages 49-70, March.
    2. Rosella Levaggi & Moretto Michele, 2008. "Investment In Hospital Care Technology Under Different Purchasing Rules: A Real Option Approach," Bulletin of Economic Research, Wiley Blackwell, vol. 60(2), pages 159-181, April.
    3. Rosella Levaggi, 2007. "Regulating internal markets for hospital care," Journal of Regulatory Economics, Springer, vol. 32(2), pages 173-193, October.
    4. Yasuo Sanjo, 2009. "Quality choice in a health care market: a mixed duopoly approach," The European Journal of Health Economics, Springer;Deutsche Gesellschaft für Gesundheitsökonomie (DGGÖ), vol. 10(2), pages 207-215, May.

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