Provider Strategic Behavior in the Global Budget System


Given the increasing pressure of health expenditure growth in recent decades, global budget payment has become an important policy option to contain health care cost. This paper presents a theoretical analysis of the incentive structure of the global budget system as well as the strategic behavioral response of the providers. I argue that global budget is a type of common-pool resources (CPR) and therefore presents the providers a social dilemma, in which the individual and group interests conflict. Under a bounded rationality framework, the analysis shows that as the payment system shifts from fee-for-service to global budget, the providers would first engage in a non-cooperative competition where the providers pay more attention to services with higher price-cost ratios. The resulting volume race would lead to a vicious circle of working harder but declining profits. However, in the awareness of the need for collective action, the providers could, with varied levels of success, overcome “the tragedy of the commons” by engaging in cooperative competition, which poses a different set of financial incentives than the earlier phase and could result in structural changes of the health care market in the long-run. Implications for empirical testing are then discussed.


Thesis Draft, Paper 1
Last updated on 12/04/2012