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

Seungchul Lee () and Robert Rosenman

Journal of Industry, Competition and Trade, 2013, vol. 13, issue 4, 503-518

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

Keywords: prospective payment system; hospital competition; technology investment; hospital quality; I11; O33; L33 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (2)

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Working Paper: Reimbursement and Investment: Propsective Payment and For-Profit Hospitals' Market Share (2012)
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DOI: 10.1007/s10842-012-0147-4

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