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Hospital competition with soft budgets

Brekke, Kurt Richard; Siciliani, Luigi; Straume, Odd Rune
Working paper
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URI
http://hdl.handle.net/11250/163394
Date
2012-03
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  • Discussion papers (SAM) [676]
Abstract
We study the incentives for hospitals to provide quality and expend cost-reducing

effort 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.
Publisher
Norwegian School of Economics, Department of Economics
Series
Discussion paper;6/2012

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