Wednesday, August 19, 2015

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, and Odd Rune Straume, University of Minho - Economic Policies Research Unit (NIPE); CESifo (Center for Economic Studies and Ifo Institute) discuss Hospital Competition with Soft Budgets.

ABSTRACT: We study the incentives for quality provision and cost efficiency for hospitals with soft budgets, where the payer can cover deficits or confiscate surpluses. While a higher bailout probability reduces cost efficiency, the effect on quality is ambiguous. Profit confiscation reduces both quality and cost efficiency. 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.

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