ID : 1013
Studies ; Prospective payment systems ; Optimization ; Market equilibrium  ; Linear programming ; Hospitals ; Economic models ; Diagnosis related groups
Under the Prospective Payment System (PPS) implemented by Medicare in 1983, the price that hospitals are paid depends on the patient's diagnosis related group (DRG), and is derived from the average cost over all hospitals of all patients in that DRG.  An alternative method for setting prices in hospital PPSs is proposed, called equilibrium pricing, in which prices are derived from a linear programming model of competitive equilibrium.  To evaluate the improvement in incentives associated with equilibrium pricing, a measure called the disincentive index is defined, of the extent to which a set of prices creates economic disincentives to efficient behavior.  In the situation in which all hospitals compete in a single market area, it is shown that equilibrium pricing creates the best possible economic incentives, i.e., by reducing the disincentive index to zero.
Improving economic incentives in hospital prospective payment systems through equilibrium pricing, Shwartz, Michael; Lenard, Melanie L, Management Science, 40:6, Jun 1994
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