Public Hospitals - Incentives and Organization

Public hospitals are a central feature of public health care systems. Providing specialized care for many severe conditions, they are at the centre of attention of citizens as well as politicians, and they represent the bulk of health care expenditure. The efficiency of public production of hospital care is often questioned; public hospitals are perceived as overly complex and bureaucratic hierarchic organizations. Still, the hierarchy (integration) remains the prevalent organizational model for public hospitals. Is this due to inertia, vested interests or is it a rational choice? This paper uses property rights theory to analyze the organization of public hospitals. A number of theoretical cases are considered, starting with a basic scenario where the public principal is a medical department that requires an input from a support department for the production of hospital care. Subsequently a hotel services is added to the analysis, and finally a second medical department is introduced. This stepwise analysis produce the following findings: - it is optimal to the integrate the support service with the public principal because the latter's human capital is essential for the production of hospital care - the hotel service may either be outsourced (not integrated) or jointly owned by the public principal and a private entrepreneur - depending the principals readjustment cost. - if the second medical departments human capital also is essential for the production of hospital care, it may either be integrated or not integrated depending on the complementarity of assets