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An empirical investigation of procurement contract structures
1U.S. Department of Justice.
The Rand Journal of Economics
|February 2, 1995
Summary
This study modeled procurement contracts with hidden costs, finding evidence of fixed-price payments between California Medicaid and hospitals. However, the contract size did not consistently reflect cost expectations.
Area of Science:
- Health economics
- Contract theory
- Public policy
Background:
- Procurement contracting often involves asymmetric information, where one party has more knowledge of costs than the other.
- Understanding how this impacts payment structures is crucial for efficient healthcare provision.
Purpose of the Study:
- To model procurement contracting under asymmetric cost information.
- To test model predictions against real-world contracts between California's Medicaid program and hospitals.
Main Methods:
- Developed a theoretical model of procurement contracting with unobservable hospital production costs.
- Estimated hospitals' unobservable costs for Medicaid patients.
- Tested for a fixed-price payment region where payments are independent of costs.
- Examined if the size of this region correlates with expected hospital costs.
Main Results:
- Found empirical evidence supporting the existence of a fixed-price payment region in contracts.
- Could not confirm that the size of the fixed-price region is dependent on expectations of hospital costs.
Conclusions:
- The study provides evidence for fixed-price payment mechanisms in healthcare procurement.
- Further research is needed to fully understand the determinants of contract size under asymmetric information.