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Choice of Treatment Intensities by a Nonprofit Hospital Under Prospective Pricing


  • William P. Rogerson


Under prospective pricing, payers for health care essentially use price regulation of hospitals as a way of indirectly regulating the provision of treatment intensity. This paper ppresents a theory of how a nonprofit hospital selects treatment intensities for its priducts given the payer's choice of prices and then determines how the payer should select prices in light of this theory. The main result is that, in quilibrium, the ration of price to marginal cost will vary across products inversely with the elasticity of demand with respect to treatment intensity. This means that, generally, the hospital will earn positive(negative) accounting profit on products with low(high) intensity elasticities of demand.

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  • William P. Rogerson, 1993. "Choice of Treatment Intensities by a Nonprofit Hospital Under Prospective Pricing," Discussion Papers 1069, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  • Handle: RePEc:nwu:cmsems:1069

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    References listed on IDEAS

    1. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    2. Jeffrey E. Harris, 1979. "Pricing Rules for Hospitals," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 224-243, Spring.
    3. Rogerson, William P, 1990. "Quality vs. Quantity in Military Procurement," American Economic Review, American Economic Association, vol. 80(1), pages 83-92, March.
    4. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, July.
    5. Glazer, Jacob & Glazer, Jacob & McGuire, Thomas G., 1993. "Should physicians be permitted to 'balance bill' patients?," Journal of Health Economics, Elsevier, vol. 12(3), pages 239-258, October.
    6. Friedman, Bernard & Pauly, Mark, 1981. "Cost Functions for a Service Firm with Variable Quality and Stochastic Demand: The Case of Hospitals," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 620-624, November.
    7. Ma, Ching-To Albert & McGuire, Thomas G, 1993. "Paying for Joint Costs in Health Care," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 2(1), pages 71-95, Spring.
    8. A. Michael Spence, 1975. "Monopoly, Quality, and Regulation," Bell Journal of Economics, The RAND Corporation, vol. 6(2), pages 417-429, Autumn.
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