Adverse Selection, Moral Hazard, and Outlier Payment Policy |
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Authors: | Michel Mougeot,Florence Naegelen&dagger |
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Affiliation: | Michel Mougeot is at the University of Franche-Comte, CRESE, UFR SJEPG, and IEMS, University of Lausanne;. Florence Naegelen is at the University of Franche-Comte, CRESE, UFR SJEPG |
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Abstract: | In this article, we analyze the rationale for introducing outlier payments into a prospective payment system for hospitals under adverse selection and moral hazard. The payer has only two instruments: a fixed price for patients whose treatment cost is below a threshold and a cost-sharing rule for outlier patients. We show that a fixed-price policy is optimal when the hospital is sufficiently benevolent. When the hospital is weakly benevolent, a mixed policy solving a trade-off between rent extraction, efficiency, and dumping deterrence must be preferred. We show how the optimal combination of fixed price and partially cost-based payment depends on the degree of benevolence of the hospital, the social cost of public funds, and the distribution of patients severity. |
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