Abstract

http://ssrn.com/abstract=2210273
 
 

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Hospital Competition with Soft Budgets


Kurt Richard Brekke


Norwegian School of Economics (NHH) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute)

Luigi Siciliani


University of York (UK)

Odd Rune Straume


University of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute)

January 2013

CEPR Discussion Paper No. DP9302

Abstract:     
We study the incentives for hospitals to provide quality and expend cost-reducing effoort 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. When we allow for heterogeneity in costs and qualities, we also show that a softer budget can raise quality for high-cost patients (and therefore reduce 'skimping' on such patients).

Number of Pages in PDF File: 35

Keywords: Cost efficiency, Hospital competition, Quality, Soft budgets

JEL Classification: I11, I18, L13, L32

working papers series


Date posted: February 1, 2013  

Suggested Citation

Brekke, Kurt Richard and Siciliani, Luigi and Straume, Odd Rune, Hospital Competition with Soft Budgets (January 2013). CEPR Discussion Paper No. DP9302. Available at SSRN: http://ssrn.com/abstract=2210273

Contact Information

Kurt Richard Brekke (Contact Author)
Norwegian School of Economics (NHH) - Department of Economics ( email )
Helleveien 30
N-5035 Bergen
Norway

CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
Luigi Siciliani
University of York (UK) ( email )
Heslington, York YO10 5DD
United Kingdom
Odd Rune Straume
University of Minho - Economic Policies Research Unit (NIPE) ( email )
Campus de Gualtar
Braga, 4710-057
Portugal
CESifo (Center for Economic Studies and Ifo Institute)
Poschinger Str. 5
Munich, DE-81679
Germany
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