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Health Care Providers Payments Regulation when Horizontal and Vertical Differentiation Matter

  • Bardey, David
  • Canta, Chiara
  • Lozachmeur, Jean-Marie

This paper analyzes the regulation of payment schemes for health care providers competing in both quality and product differentiation of their services. The regulator uses two instruments: a prospective payment per patient and a cost reimbursement rate. When the regulator can only use a prospective payment, the optimal price involves a trade-off between the level of quality provision and the level of horizontal differentiation. If this pure prospective payment leads to underprovision of quality and overdifferentiation, a mixed reimbursement scheme allows the regulator to improve the allocation efficiency. This is true for a relatively low level of patients’transportation costs. We also show that if the regulator cannot commit to the level of the cost reimbursement rate, the resulting allocation can dominate the one with full commitment. In particular, some cost reimbursement might be optimal even for higher levels of transportation costs.

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Paper provided by Institut d'Économie Industrielle (IDEI), Toulouse in its series IDEI Working Papers with number 532.

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Date of creation: Mar 2010
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Handle: RePEc:ide:wpaper:9681
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  1. Philippe CHONÉ & Ching-to Albert MA, 2011. "Optimal Health Care Contract under Physician Agency," Annales d'Economie et de Statistique, ENSAE, issue 101-102, pages 229-256.
  2. Brekke, Kurt R. & Nuscheler, Robert & Straume, Odd Rune, 2002. "Quality and location choices under price regulation," Working Papers in Economics 24/02, University of Bergen, Department of Economics.
  3. Ching-to Albert Ma, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Papers 0047, Boston University - Industry Studies Programme.
  4. Ellis, Randall P. & McGuire, Thomas G., 1990. "Optimal payment systems for health services," Journal of Health Economics, Elsevier, vol. 9(4), pages 375-396, December.
  5. Asher Wolinsky, 1994. "Regulation of Duopoly: Managed Competition vs. Regulated Monopolies," Discussion Papers 1116, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  6. William Jack(Georgetown University), 2004. "Optimal risk adjustment in a model with adverse selection and spatial competition," Working Papers gueconwpa~04-04-15, Georgetown University, Department of Economics.
  7. Ching-to Albert Ma & James F. Burgess Jr., 1992. "Quality Competition, Welfare, and Regulation," Papers 0024, Boston University - Industry Studies Programme.
  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. Allen, Robin & Gertler, Paul J, 1991. "Regulation and the Provision of Quality to Heterogenous Consumers: The Case of Prospective Pricing of Medical Services," Journal of Regulatory Economics, Springer, vol. 3(4), pages 361-75, December.
  10. 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.
  11. Jean-Jacques Laffont & Jean Tirole, 1993. "A Theory of Incentives in Procurement and Regulation," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262121743, June.
  12. Economides, Nicholas, 1989. "Quality variations and maximal variety differentiation," Regional Science and Urban Economics, Elsevier, vol. 19(1), pages 21-29, February.
  13. 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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