This paper compares the cost and quality incentive effects of cost reimbursement and prospective payment systems in the health industry. When a provider cannot refuse patients who require high treatment costs or discriminate patients by qualities, optimally designed prospective payments can implement the efficient quality and cost reduction efforts, but cost reimbursement cannot induce any cost incentive. When the provider can refuse expensive patients, implementation of the first best requires a piecewise linear reimbursement rule that can be interpreted as a mixture of pure prospective payment and pure cost reimbursement, Under appropriate conditions, prospective payment can implement the first best even when the provider can use qualities to discriminate patients.
Anecdotal and experimental evidence suggests that bargaining sessions subject to deadlines often begin with cheap talk and rejected proposals. Agreements, if they are reached at all, tend to be concluded near the deadline. We attempt to capture and explain these phenomena in a strategic bargaining model that incorporates a bargaining deadline, the possibility of strategic delay, and a lack of perfect player control over the timing of offers. Imperfect player control is generated by an exogenous uniformly-distributed random delay in offer transmission. Our model has a symmetric Markov-perfect equilibrium, unique at almost all nodes, in which players adopt strategic delay early in the game, make and reject offers later on, and reach agreements late in the game if at all. In equilibrium players miss the deadline with positive probability. The expected division of the surplus is unique and close to an even split.
We consider a model of insurance and collusion. Efficient risk sharing requires the consumer to get a monetary compensation in case of a loss. But this in turn implies consumer-provider collusion incentives to submit false claims to the insurer. We assume, however, that only some providers are collusive while some are honest, and determine the optimal contract specifying the treatment, the insurance policy and the reimbursement policy to the provider. Two cases are analyzed: the first allows contract menus that induce self-selection among the providers; the second allows contracts consisting of a single policy. In both cases, deterrence of collusion is optimal only if the probability that the provider is collusive is large. When the contract deters collusion, it is as if the provider was collusive with probability one. The first best is achieved only when the provider is honest with certainty. Furthermore, over-consumption of treatment occurs in many cases, and is sometimes used as a substitute for monetary compensation to the consumer.
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