Bargaining and the provision of health services

We model and compare the bargaining process between a purchaser of health services, such as a health authority, and a provider (the hospital) in three plausible scenarios: (a) activity bargaining: the purchaser sets the price and activity (number of patients treated) is bargained between the purchaser and the provider; (b) price bargaining: the price is bargained between the purchaser and the provider, but activity is chosen unilaterally by the provider; (c) efficient bargaining: price and activity are simultaneously bargained between the purchaser and the provider. We show that: (1) if the bargaining power of the purchaser is high (low), efficient bargaining leads to higher (lower) activity and purchaser's utility, and lower (higher) prices and provider's utility compared to price bargaining. (2) In activity bargaining, prices are lowest, the purchaser's utility is highest and the provider's utility is lowest; activity is generally lowest, but higher than in price bargaining for high bargaining power of the purchaser. (3) If the purchaser has higher bargaining power, this reduces prices and activity in price bargaining, it reduces prices but increases activity in activity bargaining, and it reduces prices but has no effect on activity in efficient bargaining.