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Investment in Hospital Care Technology under Different Purchasing Rules: A Real Option Approach

Author

Listed:
  • Michele Moretto

    (Dipartimento di Scienze Economiche, University of Brescia)

  • Rosella Levaggi

    (Dipartimento di Scienze Economiche, University of Brescia)

Abstract
In this article, we analyse the optimal investment decision in a new health care technology of a representative 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 purchasing rules might influence the level of investment. We show that the investment in new technology is best incentivate within a long term contract where the number of treatments reimbursed depends on the level of investment made in the period 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 effect on the decision to invest.

Suggested Citation

  • Michele Moretto & Rosella Levaggi, 2004. "Investment in Hospital Care Technology under Different Purchasing Rules: A Real Option Approach," Working Papers 2004.75, Fondazione Eni Enrico Mattei.
    • Handle: RePEc:fem:femwpa:2004.75
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    References listed on IDEAS

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    Cited by:

    1. Ghandour, Ziad & Siciliani, Luigi & Straume, Odd Rune, 2022. "Investment and quality competition in healthcare markets," Journal of Health Economics, Elsevier, vol. 82(C).
    2. Rosella Levaggi & Michele Moretto & Vincenzo Rebba, 2009. "Investment decisions in hospital technology when physicians are devoted workers," Economics of Innovation and New Technology, Taylor & Francis Journals, vol. 18(5), pages 487-512.
    3. Lasserre, Pierre & Moatti, Jean-Paul & Soubeyran, Antoine, 2006. "Early initiation of highly active antiretroviral therapies for AIDS: Dynamic choice with endogenous and exogenous learning," Journal of Health Economics, Elsevier, vol. 25(3), pages 579-598, May.
    4. Finocchiaro Castro, Massimo & Guccio, Calogero & Pignataro, Giacomo & Rizzo, Ilde, 2014. "The effects of reimbursement mechanisms on medical technology diffusion in the hospital sector in the Italian NHS," Health Policy, Elsevier, vol. 115(2), pages 215-229.
    5. Levaggi, Rosella & Moretto, Michele & Pertile, Paolo, 2014. "Two-part payments for the reimbursement of investments in health technologies," Health Policy, Elsevier, vol. 115(2), pages 230-236.
    6. Tolga, A. Cagri, 2020. "Real options valuation of an IoT based healthcare device with interval Type-2 fuzzy numbers," Socio-Economic Planning Sciences, Elsevier, vol. 69(C).
    7. Laura Levaggi & Rosella Levaggi, 2010. "Strategic costs and preferences revelation in the allocation of resources for health care," International Journal of Health Economics and Management, Springer, vol. 10(3), pages 239-256, September.
    8. 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.
    9. Paolo Pertile, 2008. "Investment in Health Technologies in a Competitive Model with Real Options," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 10(5), pages 923-952, October.
    10. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2012. "DRGs: the link between investment in technologies and appropriateness," Working Papers 31/2012, University of Verona, Department of Economics.
    11. Rosella Levaggi, 2005. "Hospital Health Care: Pricing and Quality Control in a Spatial Model with Asymmetry of Information," International Journal of Health Economics and Management, Springer, vol. 5(4), pages 327-349, December.

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    More about this item

    Keywords

    Health care technologies; Medical quality; Irreversible investments; Real options;
    All these keywords.

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • D18 - Microeconomics - - Household Behavior - - - Consumer Protection

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