Price-Directed Cost Sharing and Demand Allocation among Service Providers with Multiple Demand Sources and Multiple Facilities

31 Dec 2019

Operations Research and Operations Management

Hanlin Liu, Yimin Yu, Saif Benjaafar, Huihui Wang

Published in Manufacturing and Service Operations Management, June 2020

To reduce delays and increase service quality, service collaboration is increasingly popular among service providers. For example, In the face of escalating healthcare costs and in an effort to improve efficiency across the three levels of care, China is promoting collaboration among hospitals and community health centres. Hong Kong and the U.K. also adopt public private partnerships (PPPs) to reduce the waiting time for public hospitals. However, successful collaboration requires well-structured compensations and incentives for the different parties with regard to how the benefits and costs should be shared. There is also a need for coordination at the operational level to ensure that the collaboration is well executed.

In this research, Yimin Yu, Associate Professor, Department of Management Sciences

and co-authors provide a framework for studying the sharing of facilities and the allocation of demand among independent firms or business units with multiple facilities and multiple demand sources by taking into account delay costs, service fulfilment costs and service level requirements.

Yu and co-authors identify a cost allocation scheme that is in the core (i.e., a cost allocation that guarantees that no subsets of firms would have an incentive to form sub-coalitions on their own). Their cost allocation is simple to implement and involves three components. A firm is responsible for the delay cost customers incur at its own facilities; pays a price per unit of demand it sends to other firms; and receives payment per unit of demand from other firms that it fulfils in its own facilities.

“We show that these payments can also be implemented in a decentralized fashion through a market mechanism, where the payments correspond to clearing prices in a market where service capacity is bought and sold by the various firms. Our results also can incorporate service priorities and capacity decisions,” says Yu.

The framework and the price-directed cost allocation provide guidelines and insights on how to allocate patients and how to compensate the private sector under the PPP scheme for the healthcare in Hong Kong and the United Kingdom.