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

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  • Seungchul Lee

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  • Robert Rosenman

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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

Suggested Citation

  • Seungchul Lee & Robert Rosenman, 2013. "Reimbursement and Investment: Prospective Payment and For-Profit Hospitals’ Market Share," Journal of Industry, Competition and Trade, Springer, vol. 13(4), pages 503-518, December.
  • Handle: RePEc:kap:jincot:v:13:y:2013:i:4:p:503-518
    DOI: 10.1007/s10842-012-0147-4
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    References listed on IDEAS

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    Keywords

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

    JEL classification:

    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes
    • L33 - Industrial Organization - - Nonprofit Organizations and Public Enterprise - - - Comparison of Public and Private Enterprise and Nonprofit Institutions; Privatization; Contracting Out

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