Using subjective risk adjusting to prevent patient dumping in the health care industry

We examine how to procure health care services at minimum cost while preven ting suppliers from refusing to care for high-cost patients. A single risk- adjusted prospective payment is optimal only when it is particularly costly for the supplier to discover likely treatment costs. Cost sharing is optim al when these screening costs are somewhat smaller. When screening costs ar e sufficiently small, screening is optimally accommodated and subjective ri sk adjusting is implemented. Under subjective risk adjusting, the supplier classifies patients according to his personal assessment of likely treatmen t costs, and payments are structured accordingly. Optimal procurement polic ies are contrasted with prevailing industry policies.