Hospital Competition with Soft Budgets

type="main"> We study the incentives for quality provision and cost efficiency for hospitals with soft budgets, where the payer can cover deficits or confiscate surpluses. While a higher bailout probability reduces cost efficiency, the effect on quality is ambiguous. Profit confiscation reduces both quality and cost efficiency. First-best is achieved by a strict no-bailout and no-profit-confiscation policy when the regulated price is optimally set. However, for suboptimal prices, a more lenient bailout policy can be welfare-improving. When we allow for heterogeneity in costs and qualities, we also show that a softer budget can raise quality for high-cost patients.