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Choice of Treatment Intensities by a Nonprofit Hospital under Prospective Pricing

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  • Rogerson, William P

Abstract

Under prospective pricing, payers for health care essentially use price regulation of hospitals as a way of indirectly regulating the provision of treatment intensity. This paper presents a theory of how a nonprofit hospital selects treatment intensities for its products given the payer's choice of prices and then determines how the payer should select prices in light of this theory. The main result is that, in equilibrium, the ratio of price to marginal cost will vary across products inversely with the elasticity of demand with respect to treatment intensity. This means that, generally, the hospital will earn positive (negative) accounting profit on products with low-(high-) intensity elasticities of demand. Copyright 1994 by MIT Press.

Suggested Citation

  • Rogerson, William P, 1994. "Choice of Treatment Intensities by a Nonprofit Hospital under Prospective Pricing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 7-51, Spring.
    • Handle: RePEc:bla:jemstr:v:3:y:1994:i:1:p:7-51
    DOI: 10.1111/j.1430-9134.1994.00007.x
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    References listed on IDEAS

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    1. Baumol, William J, 1982. "Contestable Markets: An Uprising in the Theory of Industry Structure," American Economic Review, American Economic Association, vol. 72(1), pages 1-15, March.
    2. Jeffrey E. Harris, 1979. "Pricing Rules for Hospitals," Bell Journal of Economics, The RAND Corporation, vol. 10(1), pages 224-243, Spring.
    3. Daniel F. Spulber, 1989. "Regulation and Markets," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262192756, April.
    4. Glazer, Jacob & Glazer, Jacob & McGuire, Thomas G., 1993. "Should physicians be permitted to 'balance bill' patients?," Journal of Health Economics, Elsevier, vol. 12(3), pages 239-258, October.
    5. 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.
    6. Asher Wolinsky, 1993. "Regulation of Duopoly Under Asymmetric Information: Prices VS Quantities," Discussion Papers 1061, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
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