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Hospital competition with soft budgets

We study the incentives for hospitals to provide quality and expend cost-reducing effort when their budgets are soft, i.e., the payer may cover deficits or confiscate surpluses. The basic set up is a Hotelling model with two hospitals that differ in location and face demand uncertainty, where the hospitals run deficits (surpluses) in the high (low) demand state. Softer budgets reduce cost efficiency, while the effect on quality is ambiguous. For given cost efficiency, softer budgets increase quality since parts of the expenditures may be covered by the payer. However, softer budgets reduce cost-reducing effort and the profit margin, which in turn weakens quality incentives. We also find that profit confiscation reduces quality and cost-reducing effort. First best is achieved by a strict no-bailout and no-profit-confiscation policy when the regulated price is optimally set. However, for suboptimal prices a more lenient bailout policy can be welfare improving.

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Paper provided by NIPE - Universidade do Minho in its series NIPE Working Papers with number 04/2012.

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Date of creation: 2012
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Handle: RePEc:nip:nipewp:04/2012
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  1. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2007. "Competition and Waiting Times in Hospital Markets," CESifo Working Paper Series 2124, CESifo Group Munich.
  2. Brekke, Kurt R. & Nuscheler, Robert & Straume, Odd Rune, 2007. "Gatekeeping in health care," Journal of Health Economics, Elsevier, vol. 26(1), pages 149-170, January.
  3. Yu-Chu Shen & Karen Eggleston, 2009. "The effect of soft budget constraints on access and quality in hospital care," International Journal of Health Care Finance and Economics, Springer, vol. 9(2), pages 211-232, June.
  4. J. Kornai & E. Maskin & G. Roland., 2004. "Understanding the Soft Budget Constraint," VOPROSY ECONOMIKI, N.P. Redaktsiya zhurnala "Voprosy Economiki", vol. 12.
  5. 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.
  6. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2011. "Hospital Competition and Quality with Regulated Prices," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113, pages 444-469, 06.
  7. Luigi Siciliani & Anderson Stanciole & Rowena Jacobs, 2008. "Do waiting times reduce hospital costs?," Discussion Papers 08/02, Department of Economics, University of York.
  8. 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.
  9. Oliver Hart & Andrei Shleifer & Robert Vishny, 1996. "The Proper Scope of Government: Theory and an Application to Prisons," Harvard Institute of Economic Research Working Papers 1778, Harvard - Institute of Economic Research.
  10. Eggleston, Karen & Shen, Yu-Chu, 2011. "Soft budget constraints and ownership: Empirical evidence from US hospitals," Economics Letters, Elsevier, vol. 110(1), pages 7-11, January.
  11. Eggleston, Karen, 2008. "Soft budget constraints and the property rights theory of ownership," Economics Letters, Elsevier, vol. 100(3), pages 425-427, September.
  12. Hagen, Terje P. & Kaarboe, Oddvar M., 2006. "The Norwegian hospital reform of 2002: Central government takes over ownership of public hospitals," Health Policy, Elsevier, vol. 76(3), pages 320-333, May.
  13. Mark Duggan, 2000. "Hospital Ownership and Public Medical Spending," NBER Working Papers 7789, National Bureau of Economic Research, Inc.
  14. János Kornai, 2009. "The soft budget constraint syndrome in the hospital sector," Society and Economy, Akadémiai Kiadó, Hungary, vol. 31(1), pages 5-31, June.
  15. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2012. "Quality competition with profit constraints," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 642-659.
  16. Hughes, David & McGuire, Alistair, 2003. "Stochastic demand, production responses and hospital costs," Journal of Health Economics, Elsevier, vol. 22(6), pages 999-1010, November.
  17. Kornai, Janos, 2001. "Hardening the budget constraint: The experience of the post-socialist countries," European Economic Review, Elsevier, vol. 45(9), pages 1573-1599, October.
  18. Beitia, Arantza, 2003. "Hospital quality choice and market structure in a regulated duopoly," Journal of Health Economics, Elsevier, vol. 22(6), pages 1011-1036, November.
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