Journal of Regulatory Economics

, Volume 32, Issue 2, pp 173–193

Regulating internal markets for hospital care

ORIGINAL ARTICLE

DOI: 10.1007/s11149-007-9035-y

Cite this article as:
Levaggi, R. J Regul Econ (2007) 32: 173. doi:10.1007/s11149-007-9035-y
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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.

Keywords

Internal markets Asymmetry of Information Hospital care 

Notation

A

Hospital A

B

Hospital B

s

transport cost

d

distance

Ci

cost of providing health care to type i patients

βi

factor affecting patients’ severity

ei

state contingent effort of management

k,w

different hospital types

qk

quality of health care offered by hospital k

xk

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 \(\beta_i^B\)

ΔCIC

\(\left[{(e_h^\ast - e_h^{IC} ) - ((f(e_h^\ast ) - f(e_h^{IC}))}\right]\) incremental cost by asymmetry of information

Δ IC

\(p[f(e_h^{IC}) - f(e_{lh}^{IC})]\) information rent

ΔCDM

\(\left[{(e_h^\ast - e_h^{DM}) - ((f(e_h^\ast) - f(e_h^{DM}))}\right]\) 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

ΔEj

rent S can enjoy when competing with DC or DM

ΔASIC

\(p\Delta^{IC} + (1 - p)\Delta C^{IC}\) expected cost from asymmetry of information

ΔASDM

\(p\Delta^{DM} + (1 - p)\Delta C^{DM}\) expected cost from asymmetry of information

Cmin

minimum cost of providing zero quality care

ECmin

minimum expected cost

z

conditional probability

π

joint probability

JEL Classifications

I11 I18 D82 

Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  1. 1.Dipartimento di Scienze EconomicheUniversità di BresciaBresciaItaly

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