Hospital Response to Prospective Payment: Moral Hazard, Selection, and Practice-Style Effects

Publication Authors:
Ellis RP and McGuire TG
HCP Authors:Thomas McGuire PhD

In response to a change in reimbursement incentives, hospitals may change the intensity of services provided to a given set of patients, change the type (or severity) of patients they see, or change their market share. Each of these three responses, which we define as a moral hazard effect, a selection effect, and a practice-style effect, can influence average resource use in a population. We develop and implement a methodology for disentangling these effects using a panel data set of Medicaid psychiatric discharges in New Hampshire. We also find evidence for the form of quality competition hypothesized by Dranove (1987).

(June 1996)

View in Journal of Health Economics