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Yardstick competition for multi-product hospitals

Author

Listed:
  • Agrell, Per J.

    (Department of Economics, Copenhagen Business School)

  • Bogetoft, Peter

    (Department of Economics, Copenhagen Business School)

  • Halbersma, Rein

    (Department of Economics, Copenhagen Business School)

  • Mikkers, Misja C.

    (Department of Economics, Copenhagen Business School)

Abstract
Health care provision is undergoing major reforms in Europe as a reaction to rapidly increasing expenditure and lowered political acceptance to commit public finance to cover the deficits. The Dutch government will decide in 2007 if the current budget system will be replaced by a more competitive mechanism, based on the yardstick regulation principle by Shleifer (1985). One of the proposed systems for the reform can be compared to a revenue-cap implementation of a multi-product cost-yardstick mechanism. The redistribution of the sector’s relevant cost is made in proportion to the individual hospitals share of total weighted output. No regulation is made of the multi-lateral contractual relations between users, insurers and hospitals. The scaling weights are updated periodically for new services and as a function of observed excess demand (waiting lists). The mechanism is shown to provide cost-reducing (effort-inducing) incentives for profit-maximizing rational agents in a single-period bargaining game. The game also shows that the regulation acts as a countervailing power for the insurers to reinforce bargaining power. The local distortion of the output profile induced by the regulation is a function of demand elasticity and cost function convexity. In case the revenue target is not binding, no welfare loss is incurred. The regime also provides incentives for cost-reducing investments in the short and the long run. These incentives manifest themselves in local reallocations of output to more efficient producers. The analysis shows that care should be taken in the updating of the weights as to provide incentives for service innovation, as well as to guarantee convergence of the price system. Although this requires econometric analyses, the alternative with a cost-based yardstick is considered superior to a revenue-based ditto for this application.

Suggested Citation

  • Agrell, Per J. & Bogetoft, Peter & Halbersma, Rein & Mikkers, Misja C., 2007. "Yardstick competition for multi-product hospitals," Working Papers 01-2007, Copenhagen Business School, Department of Economics.
    • Handle: RePEc:hhs:cbsnow:2007_001
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    Citations

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    Cited by:

    1. G. Kent Fellows & Daniel J. Dutton & Aidan Hollis, 2018. "Making Sure Orphan Drugs Don’t Get Left Behind," SPP Communique, The School of Public Policy, University of Calgary, vol. 10(6), August.
    2. AGRELL, Per & BOGETOFT, Peter, 2013. "Benchmarking and regulation," LIDAM Discussion Papers CORE 2013008, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
    3. Mikkers, Misja, 2016. "The Dutch Healthcare System in International Perspective," Other publications TiSEM 800704a0-24ee-4830-8659-2, Tilburg University, School of Economics and Management.

    More about this item

    Keywords

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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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