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.
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