Using auctions for contracting with hospitals when quality matters

This paper analyzes the problem of contracting with hospitals with hidden information when the number of patients wanting treatment depends on the quality of health care services offered. The optimal policy is characterized in the case of a single hospital. It is demonstrated that the regulator can reduce the information rent by decreasing the quality. When the regulator is assumed to be able to organize an auction for awarding the right to provide the service, we characterize the optimal auction and the first score tendering procedure implementing it. The regulator can reimburse a unit price per treated patient and let the hospital choose the level of quality. It is proved that the expected quality of health care services is greater and the expected payment is lower than in the monopoly case.