Abstract
Internal markets have been created in an attempt to shift power from producers to consumers in a context where consumers have very weak incentives to seek out low-cost producers and have little knowledge about the quality of health care. The idea is that by establishing public agencies to act as the sole purchasers on behalf of consumers in their area of jurisdiction, the asymmetry of information can be moderated and a more competitive environment created in which costs will be minimized and quality enhanced. Whether these aspirations can be fulfilled will depend on how the internal market is organized. In this article the cost-minimizing properties of alternative market structures where hospitals do not share the same objectives are examined. The scheme is designed from the standpoint of a benevolent regulator that provides services using two hospitals with fixed locations. The paper shows that price discrimination is a superior instrument. Finally some market forms are always dominated and should be avoided.
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Abbreviations
- A:
-
Hospital A
- B:
-
Hospital B
- s:
-
transport cost
- d:
-
distance
- Ci :
-
cost of providing health care to type i patients
- β i :
-
factor affecting patients’ severity
- e i :
-
state contingent effort of management
- k,w :
-
different hospital types
- q k :
-
quality of health care offered by hospital k
- x k :
-
inefficiency parameter for hospital of type k
- U:
-
utility of hospital management
- ti :
-
state contingent reimbursement scheme for zero quality output
- Ri = ti + q*:
-
state contingent reimbursement scheme
- p:
-
probability that the patient is low severity (hence low cost)
- r:
-
correlation coefficient between \(\beta_i^A\) and \(\beta_i^B\)
- ΔC IC :
-
\(\left[{(e_h^\ast - e_h^{IC} ) - ((f(e_h^\ast ) - f(e_h^{IC}))}\right]\) incremental cost by asymmetry of information
- Δ IC :
-
\(p[f(e_h^{IC}) - f(e_{lh}^{IC})]\) information rent
- ΔC DM :
-
\(\left[{(e_h^\ast - e_h^{DM}) - ((f(e_h^\ast) - f(e_h^{DM}))}\right]\) incremental cost by asymmetry of information when the purchaser observes the severity for one of the hospitals
- ΔDM :
-
\(p[f(e_h^{DM}) - f(e_{lh}^{DM})]\) information rent
- ΔE j :
-
rent S can enjoy when competing with DC or DM
- ΔAS IC :
-
\(p\Delta^{IC} + (1 - p)\Delta C^{IC}\) expected cost from asymmetry of information
- ΔAS DM :
-
\(p\Delta^{DM} + (1 - p)\Delta C^{DM}\) expected cost from asymmetry of information
- Cmin :
-
minimum cost of providing zero quality care
- ECmin :
-
minimum expected cost
- z:
-
conditional probability
- π :
-
joint probability
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Levaggi, R. Regulating internal markets for hospital care. J Regul Econ 32, 173–193 (2007). https://doi.org/10.1007/s11149-007-9035-y
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DOI: https://doi.org/10.1007/s11149-007-9035-y