Price Discrimination in Public Healthcare

Could a public healthcare system use price discrimination—paying medical service providers different fees, depending on the service provider's quality—lead to improvements in social welfare? We show that differentiating medical fees by quality increases social welfare relative to uniform pricin...

Full description

Saved in:
Bibliographic Details
Published in:Australian economic papers 2018-06, Vol.57 (2), p.181-192
Main Authors: Berg, Nathan, Kim, Jeong‐Yoo
Format: Article
Language:English
Subjects:
Discrimination
Economic models
Fees & charges
Health care
Physicians
Private hospitals
Quality
Social welfare
Citations: Items that this one cites
Items that cite this one
Online Access:Get full text
Tags: Add Tag
No Tags, Be the first to tag this record!
Description
Summary:Could a public healthcare system use price discrimination—paying medical service providers different fees, depending on the service provider's quality—lead to improvements in social welfare? We show that differentiating medical fees by quality increases social welfare relative to uniform pricing (i.e. quality‐invariant fee schedules) whenever hospitals and doctors have private information about their own ability. We also show that by moving from uniform to differentiated medical fees, the public healthcare system can effectively incentivise good doctors and hospitals (i.e. low‐cost‐types) to provide even higher levels of quality than they would under complete information. In the socially optimal quality‐differentiated medical fee system, low‐cost‐type medical‐service providers enjoy a rent due to their informational advantage. Informational rent is socially beneficial because it gives service providers a strong incentive to invest in the extra training required to deliver high‐quality services at low cost, providing yet another efficiency gain from quality‐differentiated medical fees.
ISSN:0004-900X
1467-8454
DOI:10.1111/1467-8454.12114