It Takes Three to Tango: Soft Budget Constraint and Cream Skimming in the Hospital Care Market
20 Pages Posted: 16 Jul 2005
Date Written: July 2005
Abstract
Cream skimming is an illegal behaviour that consists in choosing to treat patients according to their ability to recover. It arises from the use of prospective payment schemes in an asymmetry of information framework. In this context in fact the provider can observe some relevant information (freely or at a cost) before making his effort which will then be used to its own advantage. The paper studies the scope for these types of behaviour in a mixed market for hospital care where the hospitals do not share the same objectives. We show that in this context cream skimming is made possible by the presence of two important elements: the public hospital prefers to treat high severity patients and the regulator is unable to enforce hard budget constraint rules.
The paper adds an important dimension to the study of cream skimming as proposed by the traditional literature where asymmetry of information alone is considered the cause of this market failure. In our context in fact cream skimming mainly arises from a regulatory failure.
Keywords: Prospective payment system, hospital care, cream skimming, soft budget constraint
JEL Classification: I11, I18, D82
Suggested Citation: Suggested Citation
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