Incentives vs. Controls in Health Policy: Broadening the Debate

By Jack A. Meyer; American Enterprise Institute for Public Policy Research | Go to book overview

an industry. This question may be asked of government regulation in the health care industry as well. That is, why was mandatory prospective reimbursement used in the nine states considered rather than limiting the scope of mandatory services, establishing case management arrangements with networks of primary care physicians, offering prepaid health plans, restricting Medicaid recipients to specific health facilities, or other forms of cost containment, such as those discussed in the AEI volume Market Reforms in Health Care, particularly in the Gibson paper? 25

The second task is not a subject of this chapter, but two possible reasons why prospective reimbursement has been used as a cost containment technique in addition to the public interest and capture theories described above are that (1) prospective reimbursement mechanisms have been tested and used in foreign countries 26 and (2) some evidence exists that prospective reimbursement has achieved at least modest gains in cost containment. 27

A third task that Stigler challenged the theorists of economic regulation to undertake is to examine the effect of regulation on the allocation of resources. To our knowledge, no economist has yet even attempted to answer this question. Most studies have concerned themselves with the effects of prospective reimbursement on rising health care costs, but this question, of course, does not at all address the issue of allocative efficiency. To address that issue, one needs to measure the divergence of the rate paid to hospitals under a prospective reimbursement system from the marginal cost of health services in the hospital.


Conclusions

In view of the increasing use of mandatory prospective reimbursement systems and the empirical evidence of their success in containing hospital costs, this study sought to gain a better understanding of the factors underlying the demand for prospective reimbursement regulation. Our study was a modest beginning since only a single model was tested, but we believe the results can provide some much needed insight into why regulation occurs or does not occur in the hospital sector.

It appears, first, that states may be concerned with their budgets and the percentage of those budgets that consists of Medicaid expenditures. Further analysis is needed to understand why this is so, but funds spent for Medicaid mean less money for other beneficiaries of the state. Although the variable reflecting change in hospital costs per admission includes all hospital costs, it is reasonable to assume that

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