Optimal Hospital Payment Rules Under Rationing by Random Waiting

57 Pages Posted: 24 May 2016

See all articles by Hugh Gravelle

Hugh Gravelle

University of York, Centre for Health Economics

Fred Schroyen

Norwegian School of Economics (NHH) - Department of Economics

Date Written: April 21, 2016

Abstract

We derive optimal rules for paying hospitals in a public health care system in which providers can choose quality and random patient demand is rationed by waiting time.

Since waiting time imposes real costs on patients hospital payment rules should take account of their effect on waiting time as well as on quality and the number of patients treated. We develop a general stochastic model of rationing by waiting and use it to derive welfare maximizing payment to hospitals linked to output, expected waiting times, quality, hospital capacity and length of stay. We show that, although prospective output pricing gives hospitals an incentive to attract patients by raising quality and reducing waiting times, it must be supplemented by prices attached to other hospital decisions and outcomes except under very strong assumptions about the welfare function, patient preferences, and whether patients lose income whilst waiting.

Keywords: Rationing, Waiting times, Queues, Prospective payment, Hospitals

JEL Classification: I11, I13, I18, L51, D81

Suggested Citation

Gravelle, Hugh S. and Schroyen, Fred, Optimal Hospital Payment Rules Under Rationing by Random Waiting (April 21, 2016). NHH Dept. of Economics Discussion Paper No. 8/2016, Available at SSRN: https://ssrn.com/abstract=2783315 or http://dx.doi.org/10.2139/ssrn.2783315

Hugh S. Gravelle

University of York, Centre for Health Economics ( email )

Alcuin A Block
University of York
York, YO10 5DD
United Kingdom

Fred Schroyen (Contact Author)

Norwegian School of Economics (NHH) - Department of Economics ( email )

Helleveien 30
N-5035 Bergen
Norway

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