The optimal payment system for hospitals under adverse selection, moral hazard, and limited liability

This paper studies the optimal contract offered by a regulator to a partially altru- istic hospital under adverse selection, moral hazard, and limited liability. We consider that the hospital privately observes the severity of illness of patients and chooses a hidden quality that influences the probability of some complications or comorbidities (CCs) occurring. We analyze the conditions under which the payment, for a given Diagnosis Related Group, should be refined according to the severity of illness and the occurrence of CCs.