Privatization of local public hospitals: effect on budget, medical service quality, and social welfare

• Published in: International journal of health care finance and economics 2010-09, Vol.10 (3), p.275-299
• Main Authors: Aiura, Hiroshi, Sanjo, Yasuo
• Format: Article
• Language: English
• Subjects: Budget deficits; Choice Behavior; Comparative analysis; Competition; Duopoly; Economic Competition; Economic models; Economic Policy; Economic theory; GDP; Gross Domestic Product; Health Administration; Health care expenditures; Health Care Management; Health Economics; Health Expenditures - trends; Health Facility Merger - economics; Health Facility Merger - standards; Health Facility Merger - trends; Health services; Hospital administration; Hospital costs; Hospital units; Hospitals; Hospitals, Public - economics; Hospitals, Public - standards; Hospitals, Public - trends; Hotelling-type spatial competition; Humans; I11; Japan; L32; L33; Local government; Marginal costs; Medical technology; Medicine; Medicine & Public Health; Models, Economic; Net income; Net losses; Nonprofit hospitals; Patient Preference; Population density; Privatization; Privatization - economics; Privatization - trends; Privatization of public hospitals; Public Finance; Public Health; Quality of Health Care - economics; Quality of Health Care - standards; Quality of Health Care - trends; Quality of service; Rural areas; Rural Health Services - economics; Rural Health Services - standards; Rural Health Services - trends; Rural-urban market; Social welfare; Studies; Transportation costs; Two-region model; Urban areas; Urban Health Services - economics; Urban Health Services - standards; Urban Health Services - trends
• ISSN: 1389-6563; 2199-9023; 1573-6962; 2199-9031
• DOI: 10.1007/s10754-010-9081-3

We analyze a duopolistic health care market in which a rural public hospital competes against an urban public hospital on medical quality, by using a Hotelling-type spatial competition model extended into a two-region model. We show that the rural public hospital provides excess quality for each unit of medical service as compared to the first-best quality, and the profits of the rural public hospital are lower than those of the urban public hospital because the provision of excess quality requires larger expenditure. In addition, we investigate the impact of the partial (or full) privatization of local public hospitals.