Provider Choice of Quality and Surplus

Karen Eggleston, Nolan Miller, and Richard Zeckhauser

Abstract:  We study the quality choices of institutional health-care providers, such as hospitals, assuming that the utility function of the key organizational decision maker includes both quality of care and financial surplus. We are primarily concerned with the effect of outside claims -- particularly proportional outside claims -- on the provider's financial surplus on its choice of quality. We use the term "rate of surplus retention" to refer to the fraction of surplus remaining after deducting all such claims. Using the Arrow-Pratt coefficient of relative risk aversion as a measure of curvature of the provider's utility-from-money function, we show that increasing the surplus retention rate increases (decreases) quality if the provider's coefficient of relative risk aversion is greater than (less than) 1.

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