Hospital Competition with Soft Budgets

Kurt Brekke (), Luigi Siciliani and Odd Rune Straume

No 4073, CESifo Working Paper Series from CESifo

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. 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: hospital competition; soft budgets; quality; cost efficiency (search for similar items in EconPapers)
JEL-codes: I11 I18 L13 L32 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Related works:
Journal Article: Hospital Competition with Soft Budgets (2015)
Working Paper: Hospital competition with soft budgets (2013)
Working Paper: Hospital competition with soft budgets (2012)
Working Paper: Hospital competition with soft budgets (2012)
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