Public and private healthcare coordination: An analysis of contract mechanisms based on subsidy payments

Abstract

Many healthcare systems are composed of public and private hospitals with different features. In public hospitals, patients generally obtain service at very low prices but there exist high waiting times and lower quality service. Whereas in private ones, although the prices are much higher, the waiting times are low and the level of quality perceived by the patients is high. It is observed that most of the patients prefer to go to the public hospital, mainly because of high prices in private hospitals. This causes overcrowding in public hospitals, while private hospitals are seen to be under-utilized and have excess capacity. The aim of this study is to suggest new contract mechanisms based on pricing and subsidy policies, that can be offered by the government to private hospitals in order to design a more balanced and efficient healthcare system for society. We develop a novel analytical model for patients' preference between public and private hospitals and present different contract mechanisms based on this model. We determine the optimal parameters of the contracts and compare the results based on their effects on the healthcare system. Numerical results demonstrate that the proposed contract mechanisms can increase the total social utility significantly. In particular, when a contract mechanism based on differentiated subsidy payments is utilized, the expected waiting times in the system can be decreased and higher quality service can be obtained by the society in general without a significant increase in government expenditures.