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Investment decisions in hospital technology when physicians are devoted workers

Author

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  • Rosella Levaggi
  • Michele Moretto
  • Vincenzo Rebba

Abstract

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.

Suggested Citation

  • 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.
  • Handle: RePEc:taf:ecinnt:v:18:y:2009:i:5:p:487-512 DOI: 10.1080/10438590802547209
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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.
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    Cited by:

    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, pages 159-181.
    2. Cynthia Williams & Yara Asi & Amanda Raffenaud & Matt Bagwell & Ibrahim Zeini, 2016. "The effect of information technology on hospital performance," Health Care Management Science, Springer, pages 338-346.
    3. Hui Zhang & Christian Wernz & Anthony D. Slonim, 2016. "Aligning incentives in health care: a multiscale decision theory approach," EURO Journal on Decision Processes, Springer;EURO - The Association of European Operational Research Societies, vol. 4(3), pages 219-244, November.
    4. Levaggi, R. & Moretto, M. & Pertile, P., 2012. "Static and dynamic efficiency of irreversible health care investments under alternative payment rules," Journal of Health Economics, Elsevier, pages 169-179.

    More about this item

    Keywords

    Hospital technology; devoted worker; quality; irreversible investment; real options;

    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

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