Abstract
This paper examines the use of Agency Theory and Information Economics Models to determine the types of information that should be used in an information system. Under examination is the payment system used by the federal government to reimburse hospitals for treatment of Medicare patients. Incentives for the government and hospitals as a result of a payment system will be examined and an information system will be developed which will help to alleviate some of the incentive problems that exist. Payment is currently on the basis of Diagnosis Related Groups (DRGs). The DRGs are categories of illnesses, and hospitals receive different amounts of money for each DRG.
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