Hospital price regulation: a normative analysis

This paper focuses on recent theoretical contributions to the hospital price regulation literature. Besides the usual efficiency-rent extraction trade-off, some specific trade-off between quality enhancement and cost reduction effort or between efficiency and selection deterrence must be taken into account. Under moral hazard, we show how a prospective price can result in the first best allocation when health care demand increases with quality. When demand does not depend on quality, the first best can be achieved only in the case of a perfectly altruistic provider. Under adverse selection, we exhibit the optimal contract between a regulator and a provider when severity is not observable. Moreover, we analyze the consequences of the provider's altruism and we show how to deter patients' selection.