The impact of liability for malpractice on the optimal reimbursement schemes for health services

Sonja Ossig and Eberhard Feess ()

No 396, Econometric Society 2004 Far Eastern Meetings from Econometric Society

Abstract: We analyze the impact of liability risks for malpractice on the optimal reimbursement schemes for hospitals. In our model, the hospital decides upon two unobservable efforts, a cost reduction effort and a quality improvement effort. We assume that the total effort is positive even without monetary incentives due to some intrinsic motivation, but that motivation is biased towards quality. In our basic model without liability risks, we then find that either a fee-for-service system (FFS) or a fixed-fee prospective payment system (PPS) is optimal, but mixed systems are strictly inferior. With liability risks, mixed systems are in general optimal, and the variable part of costs that should be borne by the hospital is increasing in the degree of the liability risk. This may at least partially explain why countries like Germany where liability risks are low compared to the US have been more reluctant in switching from FFS to PPS

Keywords: principal-agent-theory; multi-task; health care; hospital compensation schemes; liability law (search for similar items in EconPapers)
JEL-codes: I11 I18 K13 (search for similar items in EconPapers)
Date: 2004-08-11
New Economics Papers: this item is included in nep-hea and nep-law
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