Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/69552 
Year of Publication: 
2013
Series/Report no.: 
CESifo Working Paper No. 4073
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
We study the incentives for hospitals to provide quality and expend cost-reducing effort 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).
Subjects: 
hospital competition
soft budgets
quality
cost efficiency
JEL: 
I11
I18
L13
L32
Document Type: 
Working Paper
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