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Incentive Contracts for Public Health Care Provision under Adverse Selection and Moral Hazard


Any health care system should provide treatment so as to maximise expected social welfare. Whether health care provision is public or private, the implementation of this outcome, through the way health care providers or hospitals are compensated for the cost of providing services, has been a policy issue for a long time in a number of countries. Many payment reforms are now based on a (high-powered) DRG-price system, so as to induce cost consciousness. In this paper we analyse this issue for a public health care system, where public hospitals offer treatment. Each hospital is privately informed about the true disease of any patient, while cost control cannot be verified, and offer treatment with a stochastic outcome. Ex post outcome and realised cost of treatment can be verified, with cost depending on treatment intensity, costreducing effort and the type of disease. With a disease-contingent transfer, the hospital is able to capture a socially costly rent, because of tax distortions and because rent has no (direct) weight in the welfare function. When type of treatment can be verified, treatment should be less intensive than under complete information, if marginal cost of treatment is disease-dependent. However, rent extraction is accomplished not only by a less aggressive treatment (which has a negative impact on the likelihood for recovery), but also by offering a cost-reimbursement scheme, without any recovery-contingent bonus. When treatment is unverifiable, induced treatment should again be below the first-best level. This solution is implemented through a combination of a recovery-contingent bonus (declining in severity) and cost sharing (with the fraction of cost being reimbursed by the government being increasing in severity).

Om publikasjonen


Vislie, J.




HERO Skrifter
Nummer i serie: 6


4101 - Økonomi og helse




The Research Council of Norway, Health Economics Research programme at the University of Oslo 1998- 2003