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Effects of Competition under Prospective Payment on Hospital Costs among High and Low Cost Admissions: Evidence from California, 1983 - 1993

  • David Meltzer
  • Jeanette Chung
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    Competition and prospective payment systems have been widely used to attempt to control health care costs. Though much of the increase in medical costs over the past half-century has been concentrated among a few high-cost users of health care,prospective payment systems may provide incentives to selectively reduce expenditures on high-cost users relative to low-cost users and this pressure may be increased by competition. We use data on hospital charges and cost-to-charge ratios from California in 1983 and 1993 to examine the effects of competition on costs for high and low cost admissions before and after the establishment of the Medicare Prospective Payment System (PPS). Comparing persons above and below age 65 before and after the establishment of PPS, we find that competition is associated with increased costs before PPS in both age groups, but decreased costs afterwards, especially among those above age 65 with the highest costs. We conclude that the combination of competition and prospective payment systems may result in incentives to selectively reduce spending among the most expensive patients. This raises important issues relevant to the use Of competition and prospective payment to control costs and implies at minimum the need to carefully monitor outcomes for the sickest patients under prospective payment systems in competitive environments.

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    File URL: http://www.nber.org/papers/w8069.pdf
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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8069.

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    Date of creation: Jan 2001
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    Publication status: published as Garber, Alan M. (ed.) Frontiers in Health Policy Research, Volume 5. Cambridge, MA: MIT Press, 2002.
    Handle: RePEc:nbr:nberwo:8069
    Note: HC
    Contact details of provider: Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Web page: http://www.nber.org
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    1. Cutler, David M, 1995. "The Incidence of Adverse Medical Outcomes under Prospective Payment," Econometrica, Econometric Society, vol. 63(1), pages 29-50, January.
    2. Marsha Gold & Lyle Nelson & Timothy Lake & Robert Hurley & Robert Berenson, 1995. "Behind the Curve: A Critical Assessment of How Little is Known about Arrangements between Managed Care Plans and Physicians," Mathematica Policy Research Reports 2efe3ee37e15474f8d3d6acf9, Mathematica Policy Research.
    3. Hodgkin, Dominic & McGuire, Thomas G., 1994. "Payment levels and hospital response to prospective payment," Journal of Health Economics, Elsevier, vol. 13(1), pages 1-29, March.
    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. 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.
    6. David M. Cutler & Ellen Meara, 1997. "The Medical Costs of The Young and Old: A Forty Year Perspective," NBER Working Papers 6114, National Bureau of Economic Research, Inc.
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