Parallel_Session_2_Talk_4_Spika

Swiss Health Economics Workshop

September 13, 2013

Internal decision-making processes and hospital

behavior Hierarchical principal-agent vs. bargainingmodels

Simon Spika, University Hospital Zurich, Finance Department

Peter Zweifel, Emeritus, University of Zurich, Department of Economics, Switzerland

16.09.2013Seite 1S. Spika, P. Zweifel, Internal decision-making processes and hospital behavior

Motivation and objectiveTypical hospital objective functions in PA models

Ma (1994)

Journal of Economics &

Management Strategy, Vol.

3, No. 1, 93 - 111

Chalkley/Malcomson (1998)

The Economic Journal, No. 108,

1093 - 1110

Ellis (1998)

Journal of Health Economics,

No. 17, 537 - 555

Hospital profit net of disutility of

providing service

Linear combination of patient benefit

and hospital profit

Sum of hospital profit and patient

benefit net of disutility


Motivation and objective (cont'd)Derive the objective function as the outcome of an internal decision-making process

„We assume that some final solution is obtained among the tastes of the

administrator, the trustees, and the medical staff, so that we can speak of the

tastes of the hospital's decision maker.“ [Newhouse (1970)]

What does that solution looks like? What do I need to know about the

internal decision-making process?

Hospital

Management

Physicians

Nursing

personnel

Support

Sponsor?


ModelingGeneral setup

� Sponsor (government agency, social insurer):

− Delegates treatment of patients to a hospital

− Designs payment system

� Relevant decision-makers in the hospital

− Management:

− Responsible for financial viability of hospital

− Chief physician:

− Decides on treatment

− Establishes case severity


Modeling (cont'd)Model overview

payment /

cost ceiling

Hospital

Sponsor

Chief

Physician

Patient

Management

Panel A: PA mechanism

payment /

cost ceiling

treatment true case

severity

report case

sev.

report case

sev.

Panel B: Nash bargaining

Hospital

Chief

Physician

Patient

Management

Sponsor

payment /

cost ceiling

report case

sev.

payment /

cost ceiling

report case

sev.

treatment true case

severity


Modeling (cont'd)Model overview

Hospital

Sponsor

Chief

Physician

Patient

Management

Hospital

Chief

Physician

Patient

Management

Sponsor

Panel A: PA mechanism Panel B: Nash bargaining

Cost ceiling for

management /

chief physician

defined by

sponsor/manage-

ment

Transfer from

sponsor/manage-

ment to

management/chief

phyiscian

Case sevrity as

reported by

management/ chief

physician to

sponsor/manage-

ment

True case severity


Modeling (cont'd)The four decision-making processes

PA mechanismNash bargaining

solution

Full information

(internal)*DP1 DP2

Asymmetric

information (internal)**DP3 DP4

*) Chief physician always reports truthfully**) Chief physician only reports truthfully, if this is the dominant strategy


Modeling (cont’d)Objectives of players and participation constraints I

• Chief physician− Utility depends on patient benefit and payment received

− Treats patient only if

• Sponsor− Maximizes severity weighted patients benefit net of expenditure


Modeling (cont’d)Objectives of players and participation constraints II

• Management− Focuses on hospital’s profit (transfer received minus payment to chief

physician)

− Accepts arrangement with the chief physician only if

− Accepts sponsor's offer only if

(internal participation constraint)

(external participation constraint)


ResultsProposition

If management and chief physician are both risk neutral and both

putting equal weight of one on tp, all solutions, which are Pareto

efficient (for management and physician), maximize surplus S and

have the same opitmal report strategy in common.


If management and chief physician are both risk neutral and both

putting equal weight of one on tp, all solutions, which are Pareto

efficient (for management and physician), maximize surplus S and

have the same opitmal report strategy in common.

ResultsProposition

Utility physician

Profit(>g)

(>g)


Results (cont’d)Objective functions as the outcome of decision-making processes

• DP1, DP2, DP4 (given chief physician's bargaining power not too small) all

result in


solution

Full information

(internal)DP1 DP2

Asymmetric

information (internal)DP3 DP4



• DP1, DP2, DP4 (given chief physician's bargaining power not too small) all

result in

− No distortion due to internal asymmetry of information between chief

physician and management

− DP4: Chief physician’s information rent absorbed in his/her bargained

surplus

− Rent extraction – efficiency trade-off as in “traditional” PA-models with

two-tier hierarchy subject to adverse selection



• Decision-making process 3


solution

Full information

(internal)DP1 DP2

Asymmetric

information (internal)DP3 DP4



• Decision-making process 3

− Information rent for chief pyhsician is not internalized

− Management takes into account 'virtual expense’

− Sponsor must “pay twice” for truthful reporting

− Rent-extraction – efficiency trade-off less favorable than in the case of

DP1, DP2, DP4


Conclusion

� Information on the hospital’s internal decision process is relevant for the

sponsor

� Sponsor needs to structure hospital payment differently, if DP3 obtains

� Limitations:

• Equivalence of DP1, DP2 and DP4 conditional on

− Risk neutrality of management and chief physician

− No restrictions on payment tp

• In real hospitals, decision-making processes are likely to be more

complex

� Crucial insight: Consideration of internal decision processes is necessary

for developing “optimal” hospital payment systems.


References

• J.-J. Laffont and D. Martimort. The Theory of Incentives. Princeton

University Press, 2002.

• M. Chalkley and J. M. Malcomson. “Cost sharing in health service provision:

An empirical assessment of cost saving”, Journal of Public Economics,

(84):219–249, 2002.

• R. P. McAfee and J. McMillan. “Organizational diseconomies of scale”,

Journal of Economics & Management Strategy, 4(3):399–426, 1995.

• R. Boadway, M. Marchand, and M. Sato. “An optimal contract approach to

hospital financing”. Journal of Health Economics, (23):85–110, 2004.

Health & Medicine

Parallel_Session_2_Talk_4_Spika