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Hospital competition with soft budgets

Author

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  • Brekke, Kurt Richard
  • Siciliani, Luigi
Abstract
We study the incentives for hospitals to provide quality and expend cost-reducing effoort 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).

Suggested Citation

  • Brekke, Kurt Richard & Siciliani, Luigi, 2013. "Hospital competition with soft budgets," CEPR Discussion Papers 9302, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:9302
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    References listed on IDEAS

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    1. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2008. "Competition and waiting times in hospital markets," Journal of Public Economics, Elsevier, vol. 92(7), pages 1607-1628, July.
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    5. Brekke, Kurt R. & Siciliani, Luigi & Straume, Odd Rune, 2012. "Quality competition with profit constraints," Journal of Economic Behavior & Organization, Elsevier, vol. 84(2), pages 642-659.
    6. Kurt R. Brekke & Luigi Siciliani & Odd Rune Straume, 2011. "Hospital Competition and Quality with Regulated Prices," Scandinavian Journal of Economics, Wiley Blackwell, vol. 113, pages 444-469, June.
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    12. Kurt R. Brekke & Robert Nuscheler & Odd Rune Straume, 2006. "Quality and Location Choices under Price Regulation," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 15(1), pages 207-227, March.
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    Citations

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    Cited by:

    1. Brekke, Kurt R. & Canta, Chiara & Siciliani, Luigi & Straume, Odd Rune, 2021. "Hospital competition in a national health service: Evidence from a patient choice reform," Journal of Health Economics, Elsevier, vol. 79(C).
    2. Thomas Czypionka & Markus Kraus & Susanne Mayer & Gerald Röhrling, 2014. "Efficiency, ownership, and financing of hospitals: The case of Austria," Health Care Management Science, Springer, vol. 17(4), pages 331-347, December.
    3. Levaggi, Laura & Levaggi, Rosella, 2020. "Is there scope for mixed markets in the provision of hospital care?," Social Science & Medicine, Elsevier, vol. 247(C).
    4. Guccio, Calogero & Lisi, Domenico & Pignataro, Giacomo, 2014. "Readmission and Hospital Quality under Prospective Payment System," MPRA Paper 56490, University Library of Munich, Germany.
    5. Gaughan, James & Gutacker, Nils & Grašič, Katja & Kreif, Noemi & Siciliani, Luigi & Street, Andrew, 2019. "Paying for efficiency: Incentivising same-day discharges in the English NHS," Journal of Health Economics, Elsevier, vol. 68(C).
    6. Berger, Michael & Sommersguter-Reichmann, Margit & Czypionka, Thomas, 2020. "Determinants of soft budget constraints: how public debt affects hospital performance in Austria," LSE Research Online Documents on Economics 116865, London School of Economics and Political Science, LSE Library.
    7. Berta, Paolo & Guerriero, Carla & Levaggi, Rosella, 2021. "Hospitals’ strategic behaviours and patient mobility: Evidence from Italy," Socio-Economic Planning Sciences, Elsevier, vol. 77(C).
    8. Hehenkamp, Burkhard & Kaarbøe, Oddvar M., 2020. "Location choice and quality competition in mixed hospital markets," Journal of Economic Behavior & Organization, Elsevier, vol. 177(C), pages 641-660.
    9. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2023. "Dynamic, incentive-compatible contracting for health services," Working Papers 2023.16, Fondazione Eni Enrico Mattei.
    10. Cavalieri, M. & Guccio, C. & Lisi, D. & Pignataro, G., 2015. "Does the Extent of Per-Case Payment System Affect Hospital Efficiency? Evidence from the Italian NHS," Health, Econometrics and Data Group (HEDG) Working Papers 15/29, HEDG, c/o Department of Economics, University of York.
    11. Li, Zhong-Ping & Wang, Jian-Jun, 2021. "Effects of healthcare quality and reimbursement rate in a hospital association," Socio-Economic Planning Sciences, Elsevier, vol. 76(C).
    12. Castro, Massimo Finocchiaro & Ferrara, Paolo Lorenzo & Guccio, Calogero & Lisi, Domenico, 2019. "Medical malpractice liability and physicians’ behavior: Experimental evidence," Journal of Economic Behavior & Organization, Elsevier, vol. 166(C), pages 646-666.
    13. János Kornai, 2014. "The soft budget constraint," Acta Oeconomica, Akadémiai Kiadó, Hungary, vol. 64(supplemen), pages 25-79, November.
    14. Xidong Guo, 2024. "An analysis of a rural hospital's investment decision under different payment systems," Health Economics, John Wiley & Sons, Ltd., vol. 33(4), pages 714-747, April.
    15. Kornai, János, 2014. "Bevezetés A puha költségvetési korlát című kötethez [Introduction to the author s volume entitled Soft Budget Constraint]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 845-897.
    16. Castro, M.F.; & Ferrara, P.; & Guccio, C.; & Lisi, D.;, 2018. "Medical Malpractice Liability and Physicians’ Behavior:Experimental Evidence," Health, Econometrics and Data Group (HEDG) Working Papers 18/11, HEDG, c/o Department of Economics, University of York.
    17. Donald J. Wright, 2016. "Soft Budget Constraints in Public Hospitals," Health Economics, John Wiley & Sons, Ltd., vol. 25(5), pages 578-590, May.
    18. Paolo Berta & Carla Guerriero & Rosella Levaggi, 2018. "The dark side of fiscal federalism:evidence from hospital care in Italy," Working papers 72, Società Italiana di Economia Pubblica.
    19. Berger, Michael & Sommersguter-Reichmann, Margit & Czypionka, Thomas, 2020. "Determinants of soft budget constraints: How public debt affects hospital performance in Austria," Social Science & Medicine, Elsevier, vol. 249(C).
    20. Finocchiaro Castro, Massimo & Ferrara, Paolo Lorenzo & Guccio, Calogero & Lisi, Domenico, 2021. "Optimal mixed payment system and medical liability. A laboratory study," MPRA Paper 110276, University Library of Munich, Germany.

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    More about this item

    Keywords

    Cost efficiency; Hospital competition; Quality; Soft budgets;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets
    • L32 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Public Enterprises; Public-Private Enterprises

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