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Investment and Quality Competition in Healthcare Markets

Author

Listed:
  • Ziad Ghandour

    (Universidade do Minho, Escola de Economia e Gestão, Centre for Research in Economics and Management (NIPE))

  • Luigi Siciliani

    (Department of Economics and Related Studies, University of York)

  • Odd Rune Straume

    (Department of Economics/NIPE, University of Minho and Department of Economics, University of Bergen)

Abstract

We study the strategic relationship between hospital investment in health technologies and provision of service quality. We use a spatial competition framework with altruistic providers and allow for hospital investment and quality provision to be either complements or substitutes in the patient health benefit and provider cost functions. We assume that each hospital commits to a certain investment level before deciding on the provision of service quality. We show that, compared to a simultaneous-move benchmark, providers´lack of ability to commit to a particular quality level generally leads to either under- or overinvestment. Underinvestment arises when the price-cost margin is positive and when quality and investments are strategic complements. In turn, this has implications for the optimal design of hospital payment contracts. We show that, differently from the simultaneous-move case, the first-best solution is generally not attainable by setting the fixed price at the appropriate level, but the regulator must complement the payment contract with at least one more instrument to address under- or overinvestment. We also analyse the welfare effects of different policy options (separate payment for investment, through a higher per-treatment price, or refinement of pricing) to reimburse hospitals for their investments.

Suggested Citation

  • Ziad Ghandour & Luigi Siciliani & Odd Rune Straume, 2021. "Investment and Quality Competition in Healthcare Markets," NIPE Working Papers 03/2021, NIPE - Universidade do Minho.
  • Handle: RePEc:nip:nipewp:3/2021
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    References listed on IDEAS

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    3. Xidong Guo, 2024. "An analysis of a rural hospital's investment decision under different payment systems," Health Economics, John Wiley & Sons, Ltd., vol. 33(4), pages 714-747, April.
    4. Kim, Jounghyeon & McCullough, Jeffrey S. & Lee, Jinhyung, 2022. "Do liquidity constraints affect the investment decisions of California hospitals?," Economic Modelling, Elsevier, vol. 113(C).

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    More about this item

    Keywords

    Investment; Quality competition; Hospital payment;
    All these keywords.

    JEL classification:

    • D24 - Microeconomics - - Production and Organizations - - - Production; Cost; Capital; Capital, Total Factor, and Multifactor Productivity; Capacity
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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