On two-tier healthcare system under capacity constraint

In the healthcare industry, to reduce the waiting time for patients, policy makers may allow private hospitals (or called the toll system) to enter the market. However, when the total healthcare capacity in the market is limited (e.g. the number of medical staff or equipment is limited), the entrance of the toll system may offer higher salaries to attract medical staff from public hospitals (or called the free system) and reduce its capacity. Then whether or not introducing toll system in the system can reduce the waiting time becomes an issue. In this paper, we investigate the impact of capacity constraint on a two-tier healthcare system. The results show that when the total capacity is tight enough, the two-tier healthcare system often yields less social welfare than the one-tier free system; and when the total capacity is sufficient (the demand does not exceed the total capacity), the two-tier healthcare system improves the social welfare. Specially, we find under certain conditions the capacity constraint can improve social welfare. In addition, if the capacity constraint has a negative effect on the two-tier system's performance, the government can set an appropriate upper limit for the toll system's capacity to remove the negative effect.