Principal agent relationships and the efficiency of hospitals

Martijn Ludwig, Frits Van Merode, Wim Groot
European Journal of Health Economics: HEPAC: Health Economics in Prevention and Care 2010, 11 (3): 291-304
The efficiency of hospitals is an important political issue and has been the subject of a number of studies. Most studies find evidence for inefficiency but provide no theoretical explanations for differences in efficiency. This study used principal agent theory to explain differences in efficiency between hospitals. Two agency issues are examined: (1) quality of care in the relationship between hospital and patient, and (2) internal organisation, i.e. the relationship between the hospital and its main departments. It was found that efficiency and quality go together. This implies that the potential harmful information asymmetry between hospitals and patients does not appear to be a major problem, because increasing efficiency does not seem to reduce quality. Further, we find no relationship between the efficiency of departments and the efficiency of the entire hospital. The interest of hospital departments is currently not in line with the interests of the entire hospital.

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