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

Seungchul Lee and Robert Rosenman

No 2012-3, Working Papers from School of Economic Sciences, Washington State University

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 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.

Keywords: Prospective payment system; Hospital competition; Technology investment; hospital quality (search for similar items in EconPapers)
JEL-codes: I11 L33 O33 (search for similar items in EconPapers)
Pages: 34 pages
Date: 2012-05
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Related works:
Journal Article: Reimbursement and Investment: Prospective Payment and For-Profit Hospitals’ Market Share (2013)
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