HOSPITAL COST INCENTIVES IN A FRAGMENTED HEALTH-CARE SYSTEM

During the mid-1980s, hospital prospective payment regulation was asso ciated with major changes in medical practice, resulting in initially significant reductions in the rate of growth of inpatient costs. More recently, the rate of growth of hospital costs has returned to histori c levels, yet most hospitals have been reluctant to intensify their ec onomic monitoring of physicians. Using data from a large teaching hosp ital in the Midwest, this article presents a model of marginal profita bility by payor and by relative physician costliness. The results illu strate the mixed incentives for hospitals to reduce costly medical pra ctice variations.