DP2491 Public and Private Provision of Health Care

Author(s): Pedro Luis Pita Barros, Xavier Martinez-Giralt
Publication Date: June 2000
Keyword(s): Health Care, Mixed Oligopoly
JEL(s): I11, I18
Programme Areas: Public Economics, Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=2491

One of the mechanisms that is implemented in the cost containment wave in the health-care sectors in western countries is the definition, by the third-party payer, of a set of preferred providers. The insured patients have different access rules to such providers when ill. The rules specify the co-payments patient must pay when using an out-of-plan care provider. We propose to study the competitive process among providers in terms of both prices and qualities. Competition is influenced by the status of providers as in-plan or out-of-plan care providers. Also, there is a moral hazard of provider choice related to the trade-off between freedom to choose and the need to hold down costs. Our main findings are that we can define a reimbursement scheme when decisions on prices and qualities are taken simultaneously (that we relate to primary health-care sectors) such that the first-best allocation is achieved. In contrast, some type of regulation is needed to achieve the optimal solution when decisions are sequential (specialized health-care sector). We also derive some normative conclusions on the way price controls should be implemented in some European Union Member States.