The effects of hospitals’ governance on optimal contracts: Bargaining vs. contracting

• Published in: Journal of health economics 2011-03, Vol.30 (2), p.408-424
• Main Authors: Galizzi, Matteo M., Miraldo, Marisa
• Format: Article
• Language: English
• Subjects: Asymmetric information; Bargaining; Confidentiality; Contract management; Contract Services - economics; Contracting; Contracts; Contracts - economics; Cost of capital; Doctors; Equilibrium; Health administration; Health economics; Hospital Administration; Hospital Administrators; Hospitals; Humans; Insurance, Health, Reimbursement; Interprofessional Relations; Medical Staff, Hospital; Models, Organizational; Negotiating; Optimal contracts; Payment systems; Payments; Physicians; Severity of Illness Index; Strategic bargaining; Strategic bargaining Optimal contracts Hospitals Asymmetric information; Studies
• ISSN: 0167-6296; 1879-1646
• DOI: 10.1016/j.jhealeco.2010.12.001

We propose a two-stage model to study the impact of different hospitals’ governance frameworks on the optimal contracts designed by third-party payers when patients’ disease severity is the private information of the hospital. In the second stage, doctors and managers interact within either a bargaining or a contracting scenario. In the contracting scenario, managers offer a contract that determines the payment to doctors, and doctors decide how many patients to treat. In the bargaining scenario, doctors and managers strategically negotiate on both the payment to doctors and the number of patients to treat. We derive the equilibrium doctors’ payments and number of treated patients under both scenarios. We then derive the optimal contract offered by the government to the hospital in the first stage. Results show that when the cost of capital is sufficiently low, the informational rent is lower, and the social welfare is higher, in the contracting scenario.