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The European Journal of Health Economics
Published in: The European Journal of Health Economics 3/2013

01-06-2013 | Original Paper

Bargaining and the provision of health services

Authors: Luigi Siciliani, Anderson Stanciole

Published in: The European Journal of Health Economics | Issue 3/2013

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Abstract

We model and compare the bargaining process between a purchaser of health services, such as a health authority, and a provider (the hospital) in three plausible scenarios: (a) activity bargaining: the purchaser sets the price and activity (number of patients treated) is bargained between the purchaser and the provider; (b) price bargaining: the price is bargained between the purchaser and the provider, but activity is chosen unilaterally by the provider; (c) efficient bargaining: price and activity are simultaneously bargained between the purchaser and the provider. We show that: (1) if the bargaining power of the purchaser is high (low), efficient bargaining leads to higher (lower) activity and purchaser’s utility, and lower (higher) prices and provider’s utility compared to price bargaining. (2) In activity bargaining, prices are lowest, the purchaser’s utility is highest and the provider’s utility is lowest; activity is generally lowest, but higher than in price bargaining for high bargaining power of the purchaser. (3) If the purchaser has higher bargaining power, this reduces prices and activity in price bargaining, it reduces prices but increases activity in activity bargaining, and it reduces prices but has no effect on activity in efficient bargaining.
Appendix
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Footnotes
1
Dor and Watson [12] evaluate how different payment mechanisms affect the incentives in the relationship between hospitals and physicians.
 
2
See also Wright [35] for a model of price regulation in the pharmaceutical sector where the regulator and the pharmaceutical company bargain over a subsidy.
 
3
The Nash bargaining solution has been used extensively in labour economics to examine negotiations between trade unions and firms with respect to wages and employment. See, for example, Oswald [30] for a survey of the literature, and Manning [22], McDonald and Solow [23], Sampson [33] and Bulkley and Myles [7].
 
4
A different interpretation is that the Department of Health fixes the price, then the Health Authority and provider bargain on activity. The implicit assumption is that the Department of Health and the Health Authority share the same objective function.
 
5
This setup is analogous to the model of bargaining between a firm and a union over wage and employment [22, 23], where the firm sets the employment, but the wage is bargained with the union.
 
6
The outcome achieved in price bargaining is not efficient. As remarked by Aronsson et al. [1], “there are unexplored profits and/or utility gains from bargaining”.
 
7
This result is in line with the model of employment-wage bargaining analysed by Manning [22] in the context of firm-union negotiations. The level of employment does not depend on the payoffs of firm and union. Consequently, they “can agree on this level and then bargain about the distribution of the rents” ([22], p. 131).
 
8
Similarly, the welfare (total surplus) loss from having price bargaining as opposed to efficient bargaining is equal to \(S^{e}-S^{p}={\frac{a^{2}}{8c}} \gamma^{2}\).
 
9
We would like to thank an anonymous referee for suggesting this extension.
 
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Metadata
Title
Bargaining and the provision of health services
Authors
Luigi Siciliani
Anderson Stanciole
Publication date
01-06-2013
Publisher
Springer-Verlag
Published in
The European Journal of Health Economics / Issue 3/2013
Print ISSN: 1618-7598
Electronic ISSN: 1618-7601
DOI
https://doi.org/10.1007/s10198-012-0383-x

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