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An optimal contract approach to hospital financing

  • BOADWAY, Robin
  • MARCHAND, Maurice
  • SATO, Motohiro

Existing models of hospital financing advocate mixed schemes which include both lump-sum and cost-based payments. The doctor is generally the unique decision maker, which is unrealistic in a hospital setting where both managers and doctors are involved. This paper develops a model in which managers and doctors are responsible for different decisions within the hospital. In this model, public authorities who provide the financing, hospital managers who allocate resources withinthe hospital, and doctors who assign patients to either a low-tech or a high-tech therapy have information of increasing quality on the casemix of patients. The public authorities sign with hospital managers contracts specifying some lump-sum financing and some size of a high-tech equipment. In turn, managers, who know the broad mix of patients in the hospital, sign with hospital doctors contracts that specify the non-medical resources allocated to this facility as well as some remuneration.Doctors, who know each patient's illness severity, select the patients to be treated by the high-tech facility, and receive from public authorities some fee-for-service payment that is differenciated according to the low- or high-tech treatment used for curing their patients. What emerges is a two-stage agency problem in which contracts are designed to elicit information in the most efficient way.

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Paper provided by Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) in its series CORE Discussion Papers with number 2003021.

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Date of creation: 00 Mar 2003
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Handle: RePEc:cor:louvco:2003021
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  1. Macho-Stadler, Ines & Perez-Castrillo, J. David, 2001. "An Introduction to the Economics of Information: Incentives and Contracts," OUP Catalogue, Oxford University Press, edition 2, number 9780199243273.
  2. Baron, David P., 1989. "Design of regulatory mechanisms and institutions," Handbook of Industrial Organization, in: R. Schmalensee & R. Willig (ed.), Handbook of Industrial Organization, edition 1, volume 2, chapter 24, pages 1347-1447 Elsevier.
  3. Chalkley, M. & Malcomson, J.M., 1995. "Contracting for health services when patient demand does not reflect quality," Discussion Paper Series In Economics And Econometrics 9514, Economics Division, School of Social Sciences, University of Southampton.
  4. Laffont, Jean-Jacques & Martimort, David, 1995. "Collusion and Delegation," IDEI Working Papers 54, Institut d'Économie Industrielle (IDEI), Toulouse.
  5. Nahum D. Melumad & Dilip Mookherjee & Stefan Reichelstein, 1995. "Hierarchical Decentralization of Incentive Contracts," RAND Journal of Economics, The RAND Corporation, vol. 26(4), pages 654-672, Winter.
  6. Custer, William S. & Moser, James W. & Musacchio, Robert A. & Willke, Richard J., 1990. "The production of health care services and changing hospital reimbursement : The role of hospital-medical staff relationships," Journal of Health Economics, Elsevier, vol. 9(2), pages 167-192, September.
  7. Mark McClellan, 1997. "Hospital Reimbursement Incentives: An Empirical Analysis," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 91-128, 03.
  8. 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.
  9. Myerson, Roger B., 1982. "Optimal coordination mechanisms in generalized principal-agent problems," Journal of Mathematical Economics, Elsevier, vol. 10(1), pages 67-81, June.
  10. Nahum D. Melumad & Dilip Mookherjee, 1989. "Delegation as Commitment: The Case of Income Tax Audits," RAND Journal of Economics, The RAND Corporation, vol. 20(2), pages 139-163, Summer.
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