Chalkley M, & Malcomson J, (1998)

‘Contracting for Health Services with Unmonitored Quality’

Economic Journal 108 (449), pp. 1093-1110

• Models the effect of different hospital payment systems on the quality and volume of treatment.
• Assumes that the purchasing agency (e.g. the NHS) cares about the number of patients treated, treatment quality and cost, and the utility of hospitals.
• The purchaser can influence hospital behaviour using 3 instruments. It can alter how hospital remuneration changes w.r.t. (i) number of patients treated, (ii) total cost of treating them, and (iii) number of patients demanding treatment (whether or not they actually receive it).
• If treatment quality has many dimensions, however, the purchaser does not have sufficient instruments to achieve optimal quality of care in all dimensions.
• Note that this is (at least implicitly) a monopoly model – no competition among hospitals is assumed.
  

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