Investment decisions in hospital technology when physicians are devoted workers
This paper analyses the decision to invest in a new technology (as a way to increase quality) by a hospital using a real option framework. The environment is characterised by uncertainty on costs and returns of such investment and by the assumption that physicians are 'devoted workers'. We model the behaviour of three main actors: an agency purchasing hospital care (purchaser), a hospital (provider) and a representative hospital physician. The purchaser rewards the hospital at a fixed price for each patient treated and sets a quality-contingent long-term contract with the hospital according to a purchasing rule. First, we show that the presence of devoted physicians allows the hospital to reduce its investment while increasing the level of quality of care provided. We then analyse how the purchaser may influence the timing of the hospital's investment and the quality of care through strategic setting of the purchasing rule parameters. In particular, we show that if the purchaser aims at maximising overall quality of hospital care when physicians are devoted workers, it is not optimal to set a purchasing rule that cancels out the value of the option to defer the hospital's investment.
Volume (Year): 18 (2009)
Issue (Month): 5 ()
|Contact details of provider:|| Web page: http://www.tandfonline.com/GEIN20|
|Order Information:||Web: http://www.tandfonline.com/pricing/journal/GEIN20|
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.:
- 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, 04.
- Rossella Levaggi & Michele Moretto, 2007. "Investment in hospital care technology under different purchasing rules: a real option approach," "Marco Fanno" Working Papers 0046, Dipartimento di Scienze Economiche "Marco Fanno".
- Michele Moretto & Rosella Levaggi, 2004. "Investment in Hospital Care Technology under Different Purchasing Rules: A Real Option Approach," Working Papers 2004.75, Fondazione Eni Enrico Mattei.
- 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.
- Rowena Jacobs & Maria Goddard & Peter C Smith, 2006. "Public services: are composite measures a robust reflection of performance in the public sector?," Working Papers 016cherp, Centre for Health Economics, University of York.
- 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
- 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.
- Patrick Francois, 2003.
"Not-For-Profit Provision of Public Services,"
Royal Economic Society, vol. 113(486), pages C53-C61, March.
- Ellis, Randall P. & McGuire, Thomas G., 1986. "Provider behavior under prospective reimbursement : Cost sharing and supply," Journal of Health Economics, Elsevier, vol. 5(2), pages 129-151, June.
- Ching-to Albert Ma, 1994.
"Health Care Payment Systems: Cost and Quality Incentives,"
0047, Boston University - Industry Studies Programme.
- Ma, Ching-to Albert, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 93-112, Spring.
- Campbell, S. M. & Roland, M. O. & Buetow, S. A., 2000. "Defining quality of care," Social Science & Medicine, Elsevier, vol. 51(11), pages 1611-1625, December.
- Glazer, Amihai, 2004. "Motivating devoted workers," International Journal of Industrial Organization, Elsevier, vol. 22(3), pages 427-440, March.
- Andrew B. Abel & Avinash K. Dixit & Janice B. Eberly & Robert S. Pindyck, .
"Options, the Value of Capital, and Investment,"
Rodney L. White Center for Financial Research Working Papers
15-95, Wharton School Rodney L. White Center for Financial Research.
- Andrew B. Abel & Avinash K. Dixit & Janice C. Eberly & Robert S. Pindyck, 1995. "Options, the Value of Capital, and Investment," NBER Working Papers 5227, National Bureau of Economic Research, Inc.
- Abel, Andrew B., 1952-, 1995. "Options, the value of capital, and investment," Working papers 3843-95., Massachusetts Institute of Technology (MIT), Sloan School of Management.
- 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.
- 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.
- Propper, Carol & Burgess, Simon & Green, Katherine, 2004. "Does competition between hospitals improve the quality of care?: Hospital death rates and the NHS internal market," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1247-1272, July.
- Francois, Patrick, 2000. "'Public service motivation' as an argument for government provision," Journal of Public Economics, Elsevier, vol. 78(3), pages 275-299, November.
- 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.
When requesting a correction, please mention this item's handle: RePEc:taf:ecinnt:v:18:y:2009:i:5:p:487-512. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Michael McNulty)
If references are entirely missing, you can add them using this form.