Investment in hospital care technology under different purchasing rules: a real option approach

Rosella Levaggi and Michele Moretto

No 46, "Marco Fanno" Working Papers from Dipartimento di Scienze Economiche "Marco Fanno"

Abstract: Quality of health care is the product of several factors as the literature has long recognized. In this article we focus on the relationship between quality and investment in health technology by analysing the optimal investment decision in a new health care technology of a repre sentative hospital that maximises its surplus in an uncertain environment. The new technology allows the hospital to increase the quality level of the care provided, but the investment is irreversible. The article uses the framework of the real option literature to show how the purchaser might in?uence the quality level by setting a quality-contingent long-term contract with the hospital.The investment in new technology is in fact best incentivated within a long-term contract where the number of treatments reimbursed depends on the level of investment made when the technology is new. In this way, asymmetry of information does not affect the outcome of the contract. In our model in fact the purchaser can verify the level of the investment only at the end of each period but the purchasing rule has an anticipating eÏect on the decision to invest.

Keywords: Health care technologies; Medical quality; Irreversible investments; Real options. (search for similar items in EconPapers)
JEL-codes: D81 I11 (search for similar items in EconPapers)
Pages: 36 pages
Date: 2007-09
New Economics Papers: this item is included in nep-hea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: INVESTMENT IN HOSPITAL CARE TECHNOLOGY UNDER DIFFERENT PURCHASING RULES: A REAL OPTION APPROACH (2008)
Working Paper: Investment in Hospital Care Technology under Different Purchasing Rules: A Real Option Approach (2004)
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Persistent link: https://EconPapers.repec.org/RePEc:pad:wpaper:0046

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