Efficiency, access and the mixed delivery of health care services

The focus of this paper is on the trade-off between cost efficiency and access in the choice of the optimal mix of public and private provision in universal health systems. We model a simple health care market in which the regulator acts as a third payer. Patients need one unit of medical service and differ in the severity of illness. A private and a public hospital are available. The private manager internalizes profits, and has an incentive both to refuse to treat costly patients and to exert effort in cost reduction. The public manager does not internalize profits, and has no incentive to reduce costs or to dump costly patients. We show that, when a relatively efficient effort in cost reduction is available, it is optimal to buy part of the services from the private hospital. This may be the case for procedures that are easier to standardize, such as elective surgery. Since the regulator acts as an insurer for the whole population, a public hospital has to be used as a last resort facility. Imposing a no-dumping constraint on the private hospital is not always optimal since eliciting effort and truthful revelation of costs may become more difficult.