FEEM working papers "Note di lavoro" series
2004 .075

Investment in Hospital Care Technology under Different Purchasing Rules: A Real Option Approach


Authors: Michele Moretto, Rosella Levaggi
Series: Climate Change and Sustainable Development
Editor: Carlo Carraro
Type: Journal
Keywords: Health care technologies,Medical quality,Irreversible investments,Real options
JEL n.: I11,I18
JEL: Bulletin of Economic Research
Pages: Vol. 60, No. 2, pp. 159-181
Date: 2008

Abstract

In this article, we analyse the optimal investment decision in a new health care technology of a representative hospital that maximises its surplus in an uncertain environment. The new technology allows the hospital to increase the quality level of the care provided, but the investment is irreversible. The article uses the framework of the real option literature to show how the purchasing rules might influence the level of investment. We show that the investment in new technology is best incentivate within a long term contract where the number of treatments reimbursed depends on the level of investment made in the period when the technology is new. In this way, asymmetry of information does not affect the outcome of the contract. In our model in fact the purchaser can verify the level of the investment only at the end of each period but the purchasing rule has an anticipating effect on the decision to invest.

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