Pricing and Capacity Design for Profit-Driven and Welfare-Driven Healthcare Providers

Abstract

In choosing healthcare services, price and waiting time are two important factors that matter to patients. Price is set by healthcare providers, while waiting time is usually endogenously determined by patient choice and the healthcare provider's capacity investment. We study the pricing and capacity design for profit-driven hospitals offering two types of healthcare services—regular and premium—serving heterogeneous patients who choose from either of the two types of services. Patients make their choices based on both price and endogenously determined equilibrium waiting time. We then benchmark profit-driven hospitals to welfare-driven hospitals to reveal how the behaviors of for-profit hospitals deviate from the socially optimal outcomes in patients waiting, service capacity, and price. We find that fewer patients are treated by premium services in profit-driven hospitals, and thus profit-driven hospitals invest less in premium service capacity and charge a higher premium for premium services than welfare-driven hospitals. These inefficiency distortions exist in profit-driven hospitals primarily because they are incentivized to differentiate between the waiting times of the two types of service to induce patients to pay a higher premium for premium services. Our results also show that if the inefficiency in patient partition is corrected, profit-driven hospitals would choose the welfare-maximizing level of premium service capacity and thus achieve socially optimal results. However, we also find that regulations such as price ceiling and capacity regulation cannot fully correct the inefficiency in patient partition and capacity decisions of profit-driven hospitals. Lastly, the model is extended in several ways to ensure robustness.