Hospital's activity-based financing system and manager: physician interaction

This paper examines the consequences of the introduction of an activity-based reimbursement system on the behavior of physicians and hospital's managers. We consider a private for-profit sector where both hospitals and physicians are initially paid on a fee-for-service basis. We show that the benefit of the introduction of an activity-based system depends on the type of interaction between managers and physicians (simultaneous or sequential decision-making games). It is shown that, under the activity-based system, a sequential interaction with physician leader could be beneficial for both agents in the private sector. We further model an endogenous timing game A la Hamilton and Slutsky (Games Econ Behav 2: 29-46, 1990) in which the type of interaction is determined endogenously. We show that, under the activity-based system, the sequential interaction with physician leader is the unique subgame perfect equilibrium.