An administered price system for hospitals

Abstract

In considering alternative health care cost containment strategies, the United States seems to be turning away from a market-structure approach in favor of performance-target planning. In the hospital field where third-party payment prevails, this latter approach is manifested by systems of regulations and constraints on the behavior of hospitals, physicians and patients superimposed on a system of cost-based reimbursement. The implications of such approaches are analyzed in this paper, and an alternative market-structure approach is proposed which provides positive incentives for efficient resource allocation and eliminates the necessity for restricting individual and institutional behavior. The proposed approach over-comes the perverse incentives of cost-based rate setting which are present in all of the prospective reimbursement systems currently being promoted. To encourage efficiency, a third-party payment system must use prices as a means of communication between the participants in the system; must provide incentives for consumers to seek out efficient hospitals; and must differentiate between hospitals (for the purpose of rate-setting) only on the basis of characteristics of their external economic environments. The system which satisfies these requirements is conceptually uncomplicated and easy to administer. Exogenous price ceilings, which converge to the competitive limit, are improvised by observing the difference between the prevailing ceiling and the prices charged by hospitals per episode of each type; the forces of consumer sovereignty and competition are preserved by reimbursing consumers at the administered price ceiling for services obtained at the prices chosen by hospitals.