Working Paper: CEPR ID: DP9302
Authors: Kurt Richard Brekke; Luigi Siciliani; Odd Rune Straume
Abstract: We study the incentives for hospitals to provide quality and expend cost-reducing effoort when their budgets are soft, i.e., the payer may cover deficits or confiscate surpluses. The basic set up is a Hotelling model with two hospitals that differ in location and face demand uncertainty, where the hospitals run deficits (surpluses) in the high (low) demand state. Softer budgets reduce cost efficiency, while the effect on quality is ambiguous. For given cost efficiency, softer budgets increase quality since parts of the expenditures may be covered by the payer. However, softer budgets reduce cost-reducing effort and the profit margin, which in turn weakens quality incentives. We also find that profit confiscation reduces quality and cost-reducing effort. 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 (and therefore reduce 'skimping' on such patients).
Keywords: cost efficiency; hospital competition; quality; soft budgets
JEL Codes: I11; I18; L13; L32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Softer budgets (H61) | Weaken hospitals' incentives for cost efficiency (D61) |
| Higher bailout probability (G28) | Reduced expected deficits (H68) |
| Reduced expected deficits (H68) | Less effort on cost reductions (D24) |
| Softer budgets (H61) | Ambiguous effect on quality incentives (L15) |
| Softer budgets (H61) | Quality investments (G11) |
| Softer budgets (H61) | Negative effect on quality (L15) |
| Profit confiscation (H13) | Detrimental to quality (L15) |
| Profit confiscation (H13) | Detrimental to cost efficiency (D61) |
| Strict no-bailout policy (G28) | Maximizes social welfare (D69) |
| Lenient bailout policy (G28) | Welfare improving under certain conditions (D60) |