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Paying for Joint Costs in Health Care

  • Ma, Ching-To Albert
  • McGuire, Thomas G

The paper analyzes a regulatory game between a public and a private payer to finance hospital joint costs (mainly capital and technology expenses). The public payer (inspired by the federal Medicare program) may both directly reimburse for joint costs ("pass-through" payments) and add a margin over variable costs paid per discharge, while the private payer can only use a margin policy. The hospital chooses joint costs in response to payers' overall payment incentives. Without pass-through payments, under provision of joint costs results from free-riding behavior of payers and the first-mover advantage of the public payer. Using pass-through policy in its self-interest, the public payer actually may moderate the under provision of joint costs; under some conditions, the equilibrium allocation may be socially efficient. Our results bear directly on current Medicare policy, which is phasing out pass-through payments. Copyright 1993 by MIT Press.

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Article provided by Wiley Blackwell in its journal Journal of Economics & Management Strategy.

Volume (Year): 2 (1993)
Issue (Month): 1 (Spring)
Pages: 71-95

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Handle: RePEc:bla:jemstr:v:2:y:1993:i:1:p:71-95
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