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Evaluating Financial Risk in the Medicare Prospective Payment System

Author

Listed:
  • Maqbool Dada

    (Krannert School of Management, Purdue University, West Lafayette, Indiana 47907-1310)

  • William D. White

    (Department of Epidemiology and Public Health, Yale University School of Medicine, New Haven, Connecticut 06520-8034)

Abstract

The Medicare Prospective Payment System (PPS) is analogous to an insurance scheme in which financial risk is mitigated through experience rating. In addition, risk is also mitigated through reinsurance provisions. Although a provider may not want this reinsurance, participation is mandatory. We develop a framework for evaluating financial risk under the PPS. We use this framework to examine optional reinsurance as an alternative risk mitigation mechanism. We illustrate an application of optional reinsurance using data for Medicare psychiatric inpatient services. Our analysis indicates that viable schemes exist for implementing optional reinsurance as a prospective payment option.

Suggested Citation

  • Maqbool Dada & William D. White, 1999. "Evaluating Financial Risk in the Medicare Prospective Payment System," Management Science, INFORMS, vol. 45(3), pages 316-329, March.
  • Handle: RePEc:inm:ormnsc:v:45:y:1999:i:3:p:316-329
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    File URL: http://dx.doi.org/10.1287/mnsc.45.3.316
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    References listed on IDEAS

    as
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    3. Siegel, Carole & Jones, Kristine & Laska, Eugene & Meisner, Morris & Lin, Shang, 1992. "A risk-based prospective payment system that integrates patient, hospital and national costs," Journal of Health Economics, Elsevier, vol. 11(1), pages 1-41, May.
    4. Allen, Robin & Gertler, Paul J, 1991. "Regulation and the Provision of Quality to Heterogenous Consumers: The Case of Prospective Pricing of Medical Services," Journal of Regulatory Economics, Springer, vol. 3(4), pages 361-375, December.
    5. Lynk, William J., 1995. "The creation of economic efficiencies in hospital mergers," Journal of Health Economics, Elsevier, vol. 14(5), pages 507-530, December.
    6. Ellis, Randall P. & McGuire, Thomas G., 1988. "Insurance principles and the design of prospective payment systems," Journal of Health Economics, Elsevier, vol. 7(3), pages 215-237, September.
    7. Pope, Gregory C., 1990. "Using hospital-specific costs to improve the fairness of prospective reimbursement," Journal of Health Economics, Elsevier, vol. 9(3), pages 237-251, November.
    8. Goodall, Colin, 1990. "A simple objective method for determining a percent standard in mixed reimbursement systems," Journal of Health Economics, Elsevier, vol. 9(3), pages 253-271, November.
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