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Reimbursement and Investment: Prospective Payment and For-Profit Hospitals’ Market Share

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  • Seungchul Lee

    ()

  • Robert Rosenman

    ()

Abstract

This paper studies how the change from retrospective cost-based reimbursement to a prospective payment system shifted hospital investment strategies from quality-enhancing technologies to cost-saving technologies. A consequence of this change was the opportunity for for-profit hospitals to capture a larger share of the market. When all of a patient’s treatment costs are paid under a retrospective average cost-based program, not-for-profit hospitals invest only in the quality-enhancing technology. For-profit hospitals have no incentive to invest in either technology. As a result, most patients select not-for-profit hospitals and for-profit hospitals attract only those few patients who have extreme time preference. When hospitals are reimbursed prospectively, however, not-for-profit hospitals invest in both quality-improving and the cost-saving technologies, as do for-profit hospitals, although at lesser amounts. Quality and market shares are more equal under prospective payment, helping to explain the increasing market share of for-profit hospitals as prospective payment has become the norm. Copyright Springer Science+Business Media New York 2013

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Bibliographic Info

Article provided by Springer in its journal Journal of Industry, Competition and Trade.

Volume (Year): 13 (2013)
Issue (Month): 4 (December)
Pages: 503-518

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Handle: RePEc:kap:jincot:v:13:y:2013:i:4:p:503-518

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Web page: http://springerlink.metapress.com/link.asp?id=105724

Related research

Keywords: prospective payment system; hospital competition; technology investment; hospital quality; I11; O33; L33;

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