Journal of Industry, Competition and Trade

, Volume 13, Issue 4, pp 503–518 | Cite as

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

Article
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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.

Keywords

prospective payment system hospital competition technology investment hospital quality 

JEL classification

I11 O33 L33 
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Notes

Acknowledgment

The comments of Seung Mo Choi, Dan Friesner, Bidisha Mandal and two anonymous referees are gratefully acknowledged.

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Copyright information

© Springer Science+Business Media New York 2012

Authors and Affiliations

  1. 1.Samsung Economic Research InstituteSeoulSouth Korea
  2. 2.School of Economic SciencesWashington State UniversityPullmanUSA

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