PROSPECTIVE PAYMENTS AND HOSPITAL EFFICIENCY

This paper examines the effects of the Prospective Payment System on t he behavior of hospitals with respect to their capital allocations and the efficiency with which they produce in-patient care. A theoretical model adapted from Pope [1989] yields the testable hypotheses that as a hospital's Medicare population increases the hospital will supply g reater levels of capital and produce in-patient care using less techni cally efficient methods. A two stage test of these hypotheses is run o n a sample of US non-federal hospitals. Results from patient demand fu nctions and a stochastic profit frontier are consistent with the theor etical model.