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Health Care Payment Systems: Cost and Quality Incentives

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  • Ching-to Albert Ma

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Abstract

This paper compares the cost and quality incentive effects of cost reimbursement and prospective payment systems in the health industry. When a provider cannot refuse patients who require high treatment costs or discriminate patients by qualities, optimally designed prospective payments can implement the efficient quality and cost reduction efforts, but cost reimbursement cannot induce any cost incentive. When the provider can refuse expensive patients, implementation of the first best requires a piecewise linear reimbursement rule that can be interpreted as a mixture of pure prospective payment and pure cost reimbursement. Under appropriate conditions, prospective payment can implement the first best even when the provider can use qualities to discriminate patients. Copyright 1994 by MIT Press.

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Bibliographic Info

Paper provided by Boston University - Industry Studies Programme in its series Papers with number 0047.

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Date of creation: Mar 1994
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Handle: RePEc:fth:bostin:0047

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Postal: Boston University, Industry Studies Program; Department of Economics, 270 Bay Road, Boston, Massachusetts 02215.
Phone: 617-353-4389
Fax: 617-353-444
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Web page: http://www.bu.edu/econ/isp/
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