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Reimbursement and Investment: Propsective Payment and For-Profit Hospitals' Market Share

  • Seungchul Lee
  • Robert Rosenman

    ()

    (School of Economic Sciences, Washington State University)

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 costsaving 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.

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File URL: http://faculty.ses.wsu.edu/WorkingPapers/rosenman/WP2012-3.pdf
File Function: First version, 2012
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Paper provided by School of Economic Sciences, Washington State University in its series Working Papers with number 2012-3.

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Length: 34 pages
Date of creation: May 2012
Date of revision:
Handle: RePEc:wsu:wpaper:rosenman-14
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Web page: http://faculty.ses.wsu.edu/

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