Public and Private Hospitals, Congestion, and Redistribution

• Date: 01 February 2016
• DOI: http://doi.org/10.1111/jpet.12132
• Author: CHIARA CANTA,MARIE‐LOUISE LEROUX
• Published date: 01 February 2016

PUBLIC AND PRIVATE HOSPITALS,CONGESTION,

AND REDISTRIBUTION

CHIARA CANTA

Norwegian School of Economics

MARIE-LOUISE LEROUX

ESG - Universit´

eduQuebec`

a Montr´

eal

Abstract

This paper studies how congestion in the public health sector can be

used as both an in-kind and in-cash redistributive tool. In our model,

agents differ in productivity and they can obtain a health service ei-

ther from a congested public hospital or from a noncongested private

one at a higher price. With pure in-kind redistribution, agents fail to

internalize their impact on congestion, and the demand for the public

hospital is higher than optimal. When productivities are not observ-

able but the social planner can assign agents across hospitals, the op-

timal congestion is higher than in the full information case in order

to relax incentive constraints and foster income redistribution. Finally,

if agents can freely choose across hospitals, the optimal subsidy on the

private hospital price may be negative or positive depending on the rel-

ative importance of redistribution and efficiency concerns. In this case,

redistribution is limited if the quality of the public facility depends on

the number of users.

1. Introduction

Public services often display congestion. In the public debate, this is perceived as a ma-

jor drawback of public services, and there is a consensus that policy measures should be

taken to reduce it. However, if private noncongested facilities offering the same service

exist, high-productivity individuals may opt for the private sector. This may reduce con-

gestion in the public facility and allow the government to screen agents according to

their productivity, thus fostering income redistribution.

This paper studies how the coexistence of a congested public sector and a noncon-

gested private sector relates to income redistribution. Its main result is that a congested

Chiara Canta, Norwegian School of Economics, Helleveien 30, Bergen, Norway-5045; (chiara.canta@

nhh.no). Marie-Louise Leroux, D´

epartement des sciences ´

economiques, ESG UQAM, C.P. 8888, Succ.

Centre-ville, Montr´

eal, QC H3C 3P8, Canada; CESifo (Germany); CORE (Universit´

e catholique de

Louvain, Belgium) (leroux.marie-louise@uqam.ca).

We would like to thank K. Cuff, P. De Donder, I. Irvin, R. Lindsey, P.-C. Michaud, H. Mou, P. Pestieau,

J.-F. Wen, P.-Y. Yanni, N. R. Ziebarth, and two anonymous referees for their valuable comments on this

paper.

Received August 20, 2014; Accepted August 25, 2014.

C2014 Wiley Periodicals, Inc.

Journal of Public Economic Theory, 18 (1), 2016, pp. 42–66.

42

Hospitals, Congestion, and Redistribution 43

public system can be beneficial for redistribution, not only by redistributing in kind but

also by fostering in-cash redistribution. At the same time, because congestion depends

on the demand for the public sector, redistribution affects the level of congestion in

the public sector. This undermines the extent of redistribution with respect to a case in

which the quality of the public sector is under direct control of the social planner.

We will focus on the market of health services, where public intervention is particu-

larly strong and where the congestion of the public sector is often severe. In countries

where health services are provided by a tax-funded universal health system (such as the

United Kingdom, Italy, and Canada), patients can get treated at zero (or very low) price

in public hospitals, but may face congestion, resulting in long waiting times, lower atten-

tion from practitioners, and crowded facilities. Alternatively, they can patronize private

hospitals, where they face lower congestion, but are charged a price for the treatment.

The market for health insurance presents similar characteristics. Public health systems

often cover only basic services; private insurance, for a higher premium, offers a larger

choice of providers, limited waiting times, and better amenities. For instance, the Ger-

man health system relies on compulsory basic insurance with premiums depending on

income, but some individuals are allowed to opt out from the public system and to rely

exclusively on private health insurance that ensures faster and better services.1

It is well documented in the literature that congestion in the public health sector

is a very common phenomenon, and that it affects individual choices and well-being.2

In the case of the United Kingdom, Besley, Hall, and Preston (1999) show that waiting

times at public hospitals are the only significant variable explaining the demand for

private health insurance. Similarly, using Spanish data, Jofre-Bonet (2000) shows that

a higher differential between public and private waiting times increases the probability

of purchasing private insurance. She also finds that waiting times in the private sector

are not significantly different from zero. Acknowledging the importance of congestion

in the public health sector and the potential link between income (re)distribution and

the use of the public sector, the objective of the present paper is to design the optimal

income redistribution policy in the presence of both a congested public sector and a

noncongested private sector.

We study a model in which agents only differ in productivity and can be treated

either in a public congested hospital financed through taxation or in a noncongested

private hospital that charges a higher price. This scenario is particularly relevant in

national health systems, where patients often experience queues due to congestion in

the public sector, while the private sector offers a congestion-free service. The level

of congestion in the public hospital decreases with the capacity of the public hospital

and increases with the number of agents that use it. We assume that the capacity of the

public hospital is fixed, which is reasonable, at least in the short run. There exist obvious

constraints (for instance, in terms of public budget, time, and space) to building more

capacity, which leads to rigidities in the supply of public health services. Depending on

their productivity, agents have a different willingness to pay to avoid congestion so that,

under pure in-kind redistribution (i.e., the public hospital is financed by a head tax),

low-productivity agents use the public hospital, while high-productivity agents use the

private one. Thus, congestion is endogenous and depends on income (re)distribution.

1Civil servants and high-income individuals can opt out from the public health insurance and join

the private system. In Germany, as of 2004, 9.1% of the population had joined the private system (see

OECD, 2004).

2For a good review of the waiting time phenomenon in the case of elective surgery and policy measures

to tackle it, see, for instance, Siciliani and Hurst (2005).