Designing Institutions and Incentives in Hospitals: An Organization Economics Methodology - Economic Research Forum (ERF)

Recent seminal developments in organization economics, namely the decision rights approach, offer an opportunity to shed new light on an old question, the design of effective institutions. Drawing on conclusions about how and why firm organizational boundaries change, the decision rights approach is used in this paper as an analytical lens to develop a new method for assessing institutional and incentive design in restructured hospitals. The paper explains the decision rights approach and shows how the Decision Rights Framework developed from it, is a way of mapping of incentive structures to allow a comparative assessment of institutional design, an understudied area, as most work on hospitals has focused on assessing equity vs. efficiency tradeoffs. The new method is illustrated drawing on one example from a case study of an innovative self-corporatized hospital in Lebanon that was at the vanguard of hospital restructuring legislation adopted for system-wide reforms. A country with a strong private sector tradition, Lebanon was fertile territory for analyzing how high-powered incentive schemes emerge from a public sector setting in a manner similar to the evolution of a firm in reaction to market forces. Among the findings is that key to good design is the identification of requisite incentives and the matching up of incentives with goals through decision rights allocations. The appropriate organizational form is then a logical result. Keywords: organization economics, hospital, health sector reform, hospital finance, incentives, institutional design, corporatization, Lebanon, decision rights, and public sector efficiency.

Florence Eid


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