Optimal design of healthcare services after the separation of prescribing and dispensing

Healthcare services are customer-intensive services and usually accompanied by other treatment-related consumptions, e.g. medications. Traditionally in China, prescribing and dispensing are both made by hospitals, which causes high drug expenses. To solve this problem, the Chinese government has begun exploring the separation of prescribing and dispensing. Against this background, this paper analyses the optimal designs for healthcare services considering separated medications. We consider a service system with one monopolistic healthcare service provider, which could be a revenue-maximiser or social-welfare maximiser, and assume patients are bounded-rational with demands affected by price and quality of both service and medications. We analyse the optimal service price and service rate for cases involving either single or multiple medications. Revenue-maximiser usually prefers cost-effective medications, and when its service quality is low, more irrational patients are preferred. Its revenue increases with the number of medication types. For the social-welfare-maximiser, as the number of medication types or improved quality of certain medications does not ensure greater social welfare, its benefits depend on the prices and quality of the entire medications. For a social planner, it is effective to institute price caps to achieve socially optimal results. This paper lays theoretical foundations for price regulations of public healthcare systems.