Output based incentive schemes for public hospitals–a queueing theory approach

Abstract,We consider patients that fall in need for an elective treatment according to a Poisson process. Patients have the option between,queuing up for a free treatment in a public hospital, or going for an immediate but …nancially costly treatment,in a private hospital. We derive the steady state distribution for treatments,in the public hospital and show how the hospital can in‡uence this distribution by choosing an e¤ort level. It turns out that by exerting more e¤ort, the hospital will not only increase the average number of treatments per period, but also its variance. If the hospital is reimbursed according to a linear incentive scheme, a too powerful the incentive scheme is shown to have negative e¤ects on the e¤ort level, the reason being that a risk averse hospital tries to contain its income,risk exposure,by reducing e¤ort. In a next stage, we derive the optimal structure of the hospital’s incentive scheme,and show that the welfare maximising,bonus rate lies below the one minimising,the expected,waiting time. The paper bene…ted from presentations at the Health Economics Workshop (Bergen,