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Excessive Investment in Hospital Capacities

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  • Esther Gal‐Or

Abstract

In the present study I identify an inherent characteristic of health care markets that may lead to excessive investment by hospitals even when compensated according to a prospective reimbursement rule. It is demonstrated that the stochastic nature of the demand for medical services combined with the lumpiness of investment decisions may give rise to excessive investment when multiple hospitals select independently their levels of capacities. The source for the excessive incentives to invest is the difficulty of one hospital to internalize properly the externality generated by its investment decisions. Such an externality arises because when one hospital expands its capacity, it is more likely to be able to serve not only patients residing in its region but patients residing in neighboring regions as well.

Suggested Citation

  • Esther Gal‐Or, 1994. "Excessive Investment in Hospital Capacities," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 53-70, March.
    • Handle: RePEc:bla:jemstr:v:3:y:1994:i:1:p:53-70
    DOI: 10.1111/j.1430-9134.1994.00053.x
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    References listed on IDEAS

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    1. Friedman, Bernard & Pauly, Mark, 1981. "Cost Functions for a Service Firm with Variable Quality and Stochastic Demand: The Case of Hospitals," The Review of Economics and Statistics, MIT Press, vol. 63(4), pages 620-624, November.
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    4. Sloan, Frank A & Steinwald, Bruce, 1980. "Effects of Regulation on Hospital Costs and Input Use," Journal of Law and Economics, University of Chicago Press, vol. 23(1), pages 81-109, April.
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    6. Robert W. Staiger & Frank A. Wolak, 1992. "Collusive Pricing with Capacity Constraints in the Presence of Demand Uncertainty," RAND Journal of Economics, The RAND Corporation, vol. 23(2), pages 203-220, Summer.
    7. Weisbrod, Burton A, 1991. "The Health Care Quadrilemma: An Essay on Technological Change, Insurance, Quality of Care, and Cost Containment," Journal of Economic Literature, American Economic Association, vol. 29(2), pages 523-552, June.
    8. David M. Kreps & Jose A. Scheinkman, 1983. "Quantity Precommitment and Bertrand Competition Yield Cournot Outcomes," Bell Journal of Economics, The RAND Corporation, vol. 14(2), pages 326-337, Autumn.
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    Cited by:

    1. Alexandre Marinho, 2015. "The Process of Public Resources Allocation for Investment in Hospital Capacities," Discussion Papers 0121, Instituto de Pesquisa Econômica Aplicada - IPEA.
    2. Rajiv Sharma & Miron Stano & Renu Gehring, 2008. "Short‐term fluctuations in hospital demand: implications for admission, discharge, and discriminatory behavior," RAND Journal of Economics, RAND Corporation, vol. 39(2), pages 586-606, June.
    3. De Fraja, Gianni, 2000. "Contracts for health care and asymmetric information," Journal of Health Economics, Elsevier, vol. 19(5), pages 663-677, September.
    4. Bos, Dieter & De Fraja, Gianni, 2002. "Quality and outside capacity in the provision of health services," Journal of Public Economics, Elsevier, vol. 84(2), pages 199-218, May.

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