Title : The Lauterbach reform - Welfare effects and regulatory implications
Abstract:
Inspired by recent hospital reforms in Germany and other countries such as the United States, Australia, and France (OECD 2016; KHVVG; Centers for Medicare and Medicaid Services 2015; Australian Government Department of Health and Aged Care 2023), we propose a reg- ulatory model of the hospital market to assess the hospital reform proposed and implemented by the German Ministry of Health. At its core lies an alternative hospital financing structure and incentive system. Only hospitals that reach a predetermined quality target will receive a lump-sum transfer covering their costs. More specifically, we examine a regulatory model of hospital competition where a regulator aims at implementing a target level of quality that is given by medical experts and where hos- pitals with (semi-)altruistic physicians compete in quality for patients in a partially transparent market. Hospitals and patients are located on a Salop circle of circumference one. The model has three stages. In the first stage, a regulator sets the reimbursement price of patient treatment and a lump-sum transfer, the latter of which is only paid when a certain target level of quality is reached. In the second stage, hospitals decide whether to be active in the market or not. The active hospitals distribute evenly on the circle. In the third stage, hospitals independently decide which level of quality to implement. Finally, patients choose hospitals. We find that the reimbursement price needs to exceed the marginal cost of quality when two or more hospitals are part of the regulation. For, only then the mechanism of endogenous activity is functioning. In this case the transfer needs to fall strictly below the fixed cost of the hospital. Moreover, the implementation imposes an upper bound on the reimbursement price. A too high level of hospital altruism is detrimental to the implementation. Moreover, the market has to be sufficiently transparent. Less surprisingly, we find the optimal size of the regulatory budget is increasing in the patientsâ transportation cost, in the hospitalsâ fixed cost, in the marginal cost of treatment quality, and in the level of quality to be implemented. Furthermore, the welfare maximizing number of firms is increasing in the transportation cost but decreasing in the fixed cost of hospitals. Our analysis reveals an intricate relationship between the regulatory objective and the pe- culiarities of the health care market. Too much patient orientation on part of the hospitals (such as physician altruism) and too little transparency in the hospital market will prevent the reform from working in the intended way. Moreover, the regulation imposes a severe hold-up problem, once hospitals fail to reach the target quality and transfer payments are denied subsequently.
