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Evaluating Financial Risk in the Medicare Prospective Payment System

  • 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)

Registered author(s):

    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.

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    File URL: http://dx.doi.org/10.1287/mnsc.45.3.316
    Download Restriction: no

    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 45 (1999)
    Issue (Month): 3 (March)
    Pages: 316-329

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    Handle: RePEc:inm:ormnsc:v:45:y:1999:i:3:p:316-329
    Contact details of provider: Postal:
    7240 Parkway Drive, Suite 300, Hanover, MD 21076 USA

    Phone: +1-443-757-3500
    Fax: 443-757-3515
    Web page: http://www.informs.org/
    Email:


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    1. 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.
    2. David Dranove, 1987. "Rate-Setting by Diagnosis Related Groups and Hospital Specialization," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 417-427, Autumn.
    3. Lynk, William J., 1995. "The creation of economic efficiencies in hospital mergers," Journal of Health Economics, Elsevier, vol. 14(5), pages 507-530, December.
    4. 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.
    5. Keeler, Emmett B. & Carter, Grace M. & Trude, Sally, 1988. "Insurance aspects of DRG outlier payments," Journal of Health Economics, Elsevier, vol. 7(3), pages 193-214, September.
    6. 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.
    7. 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.
    8. 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 361-75, December.
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