Discussion Paper Series in Economics, Department of Economics, Norwegian School of Economics (NHH)
Kurt R. Brekke
Hospital competition with soft budgets.
(), Luigi Siciliani
() and Odd Rune Straume
Abstract: 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.
Keywords: Hospital competition; Soft budgets; Quality; Cost efficiency.; (follow links to similar papers)
JEL-Codes: I11; I18; L13; L32; (follow links to similar papers)
26 pages, March 15, 2012
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