Readmission treatment price and product quality in the hospital sector

Abstract

In this paper, we study the effect of readmission treatment payment in a dynamic framework characterised by competition among hospitals and sluggish beliefs of patients concerning the service quality. We find that the effect of readmission treatment payment depends on the interplay between the effect of quality in lowering readmissions and its effect on future demand. When the readmission occurrence strongly depends on the service quality, the higher the readmission treatment payment for hospitals, the lower the incentive to provide quality.Instead, when readmission depends barely on quality, the readmission payment acts as the treatment price for first admissions, and thus it reinforces the incentive to provide quality. We also show that the detrimental effect of readmission payments on quality are fed by a high degree of demand sluggishness, that is, by situation where current quality has modest effect on future demand changes.Our findings are robust to different equilibrium concepts of the differential game (i.e., open-loop and state-feedback). The results suggest that a discounted regulated price for readmission can be an effective (and cost-free) policy tool to improve health care quality, especially when the market is characterised by sluggish beliefs about quality.

Hospital competition under pay‐for‐performance: Quality, mortality, and readmissions

“…Empirical demand elasticities suggest that these are generally low (see Brekke, Gravelle, Siciliani, & Straume, 2014, for an overview) and this may be the reason for governments to wanting to supplement schemes which reward activity with those that reward quality directly. Guccio, Lisi, and Pignataro (2016) (and, in a dynamic framework, Cellini & Lisi, 2020) show that reducing the tariff for readmitted patients is welfare improving if demand responsiveness to quality is low. Chalkley and Khalil (2005) show that if patients are responsive to variations in treatment, it can be worthwhile to base payment on the health outcome achieved rather than upon the treatment delivered.…”