Effects of healthcare quality and reimbursement rate in a hospital association

Tackling the mismatch between the supply of and demand for care service is an especially important issue among many healthcare providers and regulators. To entice patient demand distribution to become more equilibrated among different regions, some countries' governments have proposed to establish a hospital association with different levels of hospitals to implement patient mobility. However, the sustainable operation and management of the hospital association have not been formally analyzed. In this paper, we develop a Salop model to analyze the strategic behavior of patient welfare and hospital utility maximizations in a hospital association comprised of three hospitals in different income regions. For the former objective, we find that the higher quality provisions may harm patient welfare, and especially there are unique quality thresholds of the hospitals such that the higher quality provisions lead to higher patient welfare only when the quality provisions exceed the thresholds. For the latter objective, we capture the optimal equilibrium quality provisions of the overall hospital association. We consider both the case when the taxation rates are regulated (TRR) and exogenous to the hospitals and the case when taxation rates are adjusted (TRA) and constrained by hospital reimbursement rates. Under the TRA case, we find that a higher reimbursement rate of the local hospital causes a higher and lower quality threshold of the hospital in the local and neighboring regions, respectively; and we also show that with the utility maximization objective, the reimbursement rate's impact depends on regulator's altruism towards patient welfare. For a relatively low altruistic behavior, a TRA could improve the quality provision but lower the number of outflowing patients in the case of a high (and low) hospital's reimbursement rate in the local (and neighboring) region. When the regulator cares more about patient welfare, the findings in the quality provision and patient mobility are just contrary. Our analytical results lead to some important policy implications for facilitating the further deployment of hospital association delivery in the hospitals' quality provision associated with patient mobility.