IS DUMPING SOCIALLY INEFFICIENT - AN ANALYSIS OF THE EFFECT OF MEDICARES PROSPECTIVE PAYMENT SYSTEM ON THE UTILIZATION OF VETERANS-AFFAIRS INPATIENT SERVICES

This paper investigates an efficiency implication of Medicare's prospe ctive payment system (PPS) on the utilization of United States Veteran s Affairs (VA) hospital inpatient services by elderly veterans. There is empirical evidence to suggest that non-VA hospitals are reacting to PPS by increasingly shifting veterans they expect may be high-cost to VA hospitals. We define as efficient, allocations that would occur if hospitals acted as perfect agents of the patient, then we show that s ome shifting would still occur if allocations were efficient. This is because VA and non-VA hospitals operate under different budget regimes , and within each diagnosis related group, veterans with different lev els of illness severity (and different non-VA insurance packages) will self-select into VA and non-VA hospitals. We derive conditions of sev erity under which different hospital types become attractive to partic ular patients.