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Horizontal and Vertical Cream Skimming in the Health Care Market

DISEFIN Working Paper No. 11/2003

24 Pages Posted: 19 May 2004  

Rosella Levaggi

University of Brescia - Department of Economics and Management

Marcello Montefiori

University of Genoa

Date Written: March 10, 2003


In the market for health care all the actors do not necessarily share the same objectives and the outcome in terms of costs and quality is rather different according to the type of providers involved. The provision of health care services is characterised by uncertainty in the cost of the treatment and its outcome. An asymmetry of information problem arises because the provider can observe some relevant information (freely or at a cost) before making his effort. Cost reimbursement rules have to be assessed in this framework, especially when they might lead to worst failures than the ones they are trying to avoid. The traditional literature (Ellis e Mc Guire, 1986; Ma ,1994) suggests to use prospective payment systems to avoid misrepresentation of costs, but this payment system ignores the effects of the private information of the provider. The ability to observe patients' severity can be used for self-interest-advantage by the hospital through two alternative behaviours: to treat only patient with specific diseases (horizontal cream skimming) or affect the state-of-the-world probability distribution opting for specific patient type within the same ailment group (vertical cream skimming). These behaviours will be defined as market cream skimming and they alter the competition among hospitals causing relevant effects in the whole market system. Horizontal cream skimming is a legal practice, although it goes against the principle of universal access to health care; it arises form a regulatory problem, i.e. the regulator has not set prices correctly and the hospital finds it convenient to specialise in some outputs. Vertical cream skimming is instead an illegal behaviour that consists in offering health care only to the patients that have a low cost. It arises from the inability of the purchaser to observe the patient type and it might be solved through control and sanctions rather than incentives. The paper studies the scope for these types of behaviour.

Keywords: Cream skimming, hospital care, prospective payment system

JEL Classification: I11, I18, D82

Suggested Citation

Levaggi, Rosella and Montefiori, Marcello, Horizontal and Vertical Cream Skimming in the Health Care Market (March 10, 2003). DISEFIN Working Paper No. 11/2003. Available at SSRN: or

Rosella Levaggi (Contact Author)

University of Brescia - Department of Economics and Management ( email )

Via San Faustino 74B
Brescia, 25122
+39 03 0298 8825 (Phone)
+39 03 0298 8837 (Fax)


Marcello Montefiori

University of Genoa ( email )

Department of Economics and Quantitative Methods
Genova, 16126
+390102095223 (Fax)

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