Hospital competition with heterogeneous patient groups: Incentives and regulation

Markus Vomhof

No 624, Ruhr Economic Papers from RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen

Abstract: Competing hospitals may not only use quality of service to attract patients but also their specialization profile. Applying a Hotelling-duopoly and interpreting respectively quality and specialization as vertical and horizontal differentiation, we analyze the optimal allocation in both dimensions for hospitals. To account for heterogeneity in preferences as well as in the health status, two patient groups are introduced. These groups differ in two parameters, (i) treatment costs and (ii) preference for a good match between patients' needs and hospitals' specialization profile. Moreover, we derive the optimal reimbursement scheme a regulator is able to achieve. The results show that the hospitals' specialization decision is determined mainly by two relations: which group is more profitable for hospitals and which group is endowed with the higher preference for a good match. The reimbursement scheme a regulator implements deviates from a pure cost partitioning scheme. In particular, the regulator aims at inducing higher quality by exploiting the heterogeneity in preferences.

Keywords: hospital competition; heterogeneity; hotelling-duopoly; regulation (search for similar items in EconPapers)
JEL-codes: I11 I18 L13 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-com, nep-hea and nep-reg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:rwirep:624

DOI: 10.4419/86788726

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