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Strategic interaction among hospitals and nursing facilities: the efficiency effects of payment systems and vertical integration

  • Dwayne Banks

    (Abt Associates Incorporated, Cambridge, MA, USA)

  • Elliott Parker

    (Department of Economics, University of Nevada, Reno, NV, USA)

  • Jeanne Wendel

    (Department of Economics, University of Nevada, Reno, NV, USA)

Rising post-acute care expenditures for Medicare transfer patients and increasing vertical integration between hospitals and nursing facilities raise questions about the links between payment system structure, the incentive for vertical integration and the impact on efficiency. In the United States, policy-makers are responding to these concerns by initiating prospective payments to nursing facilities, and are exploring the bundling of payments to hospitals. This paper develops a static profit-maximization model of the strategic interaction between the transferring hospital and a receiving nursing facility. This model suggests that the post-1984 system of prospective payment for hospital care, coupled with nursing facility payments that reimburse for services performed, induces inefficient under-provision of hospital services and encourages vertical integration. It further indicates that the extension of prospective payment to nursing facilities will not eliminate the incentive to vertically integrate, and will not result in efficient production unless such integration takes place. Bundling prospective payments for hospitals and nursing facilities will neither remove the incentive for vertical integration nor induce production efficiency without such vertical integration. However, bundled payment will induce efficient production, with or without vertical integration, if nursing facilities are reimbursed for services performed. Copyright © 2001 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/hec.585
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Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 10 (2001)
Issue (Month): 2 ()
Pages: 119-134

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Handle: RePEc:wly:hlthec:v:10:y:2001:i:2:p:119-134
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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  1. Nyman, John A., 1985. "Prospective and `cost-plus' medicaid reimbursement, excess medicaid demand, and the quality of nursing home care," Journal of Health Economics, Elsevier, vol. 4(3), pages 237-259, September.
  2. Cohen, Joel W. & Spector, William D., 1996. "The effect of Medicaid reimbursement on quality of care in nursing homes," Journal of Health Economics, Elsevier, vol. 15(1), pages 23-48, February.
  3. Custer, William S. & Moser, James W. & Musacchio, Robert A. & Willke, Richard J., 1990. "The production of health care services and changing hospital reimbursement : The role of hospital-medical staff relationships," Journal of Health Economics, Elsevier, vol. 9(2), pages 167-192, September.
  4. Dranove, David & White, William D, 1994. "Recent Theory and Evidence on Competition in Hospital Markets," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 169-209, Spring.
  5. Robinson, James C, 1996. "Administered Pricing and Vertical Integration in the Hospital Industry," Journal of Law and Economics, University of Chicago Press, vol. 39(1), pages 357-78, April.
  6. Ettner, Susan L., 1993. "Do elderly Medicaid patients experience reduced access to nursing home care?," Journal of Health Economics, Elsevier, vol. 12(3), pages 259-280, October.
  7. Nyman, John A, 1994. "The Effects of Market Concentration and Excess Demand on the Price of Nursing Home Care," Journal of Industrial Economics, Wiley Blackwell, vol. 42(2), pages 193-204, June.
  8. Klein, Benjamin & Murphy, Kevin M, 1997. "Vertical Integration as a Self-Enforcing Contractual Arrangement," American Economic Review, American Economic Association, vol. 87(2), pages 415-20, May.
  9. William D. Spector & Thomas M. Selden & Joel W. Cohen, 1998. "The impact of ownership type on nursing home outcomes," Health Economics, John Wiley & Sons, Ltd., vol. 7(7), pages 639-653.
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