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Doctors' remuneration schemes and hospital competition in two-sided markets with common network externalities

  • Bardey, David
  • Cremer, Helmuth
  • Lozachmeur, Jean-Marie

This paper uses a two-sided market model of hospital competition to study the implications of different remunerations schemes on the physicians’ side. The two-sided market approach is characterized by the concept of common network externality (CNE) introduced by Bardey et al. (2010). This type of externality occurs when occurs when both sides value, possibly with different intensities, the same network externality. We explicitly introduce e¤ort exerted by doctors. By increasing the number of medical acts (which involves a costly effort) the doctor can increase the quality of service offered to patients (over and above the level implied by the CNE). We fi rst consider pure salary, capitation or fee-for-service schemes. Then, we study schemes that mix fee-for-service with either salary or capitation payments. We show that salary schemes (either pure or in combination with fee-for-service) are more patient friendly than (pure or mixed) capitations schemes. This comparison is exactly reversed on the providers’ side. Quite surprisingly, patients always loose when a fee-for-service scheme is introduced (pure of mixed). This is true even though the fee-for-service is the only way to induce the providers to exert e¤ort and it holds whatever the patients’ valuation of this effort. In other words, the increase in quality brought about by the fee-for-service is more than compensated by the increase in fees faced by patients.

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Paper provided by Toulouse School of Economics (TSE) in its series TSE Working Papers with number 11-250.

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Date of creation: Feb 2011
Date of revision: Jul 2011
Publication status: Published in The B. E. Journal of Theoretical Economics (Contributions), vol.�12, n°1, novembre 2012.
Handle: RePEc:tse:wpaper:24907
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  1. Mark Armstrong, 2006. "Competition in two‐sided markets," RAND Journal of Economics, RAND Corporation, vol. 37(3), pages 668-691, 09.
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  9. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2008. "Hospital competition and quality with regulated prices," NIPE Working Papers 06/2008, NIPE - Universidade do Minho.
  10. Ching-to Albert Ma & Michael Riordan, 1997. "Health Insurance, Moral Hazard, and Managed Care," Papers 0080, Boston University - Industry Studies Programme.
  11. Cutler, David M. & Zeckhauser, Richard J., 2000. "The anatomy of health insurance," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 11, pages 563-643 Elsevier.
  12. Jean-Charles Rochet & Jean Tirole, 2014. "Platform Competition in Two-Sided Markets," CPI Journal, Competition Policy International, vol. 10.
  13. Gaynor, Martin & Pauly, Mark V, 1990. "Compensation and Productive Efficiency of Partnerships: Evidence from Medical Group Practice," Journal of Political Economy, University of Chicago Press, vol. 98(3), pages 544-73, June.
  14. 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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