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Information Disclosure and the Equivalence of Prospective Payment and Cost Reimbursement

By Ching-to Albert Ma and Henry Y. Mak


A health care provider chooses unobservable service-quality and cost-reduction efforts. The efforts produce quality and cost efficiency. An insurer observes quality and cost, and chooses how to disclose this information to consumers. The insurer also decides how to pay the provider. In prospective payment, the insurer fully discloses quality, and sets a prospective payment price. In cost reimbursement, the insurer discloses a value index, a weighted average of quality and cost efficiency, and pays a margin above cost. The first-best quality and cost efforts can be implemented by prospective payment and by cost reimbursement. Cost reimbursement with value index eliminates dumping and cream skimming. Prospective payment with quality index eliminates cream skimming

Topics: information disclosure, health care payment, cost reduction
Publisher: 'Elsevier BV'
Year: 2015
DOI identifier: 10.1016/j.jebo.2015.07.002
OAI identifier:
Provided by: IUPUIScholarWorks

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