Measuring Hospital Cost‐Sharing Incentives Under Refined Prospective Payment

This paper evaluates the usefulness of a model (McClellan, 1997) that was recently proposed for measuring reimbursement incentives under ongoing refinements to the hospital prospective payment system. The model is applied to a single major disease category (HIV infection) for which the hospital reimbursement system has undergone dramatic refinements in recent years. The paper highlights a problem in the original specification, namely, the use of endogenous costs as an explanatory variable. The paper illustrates how hospital response to both marginal price incentives (e.g., a change in the supply of payment‐related services) and average price incentives (e.g., a change in the supply of non‐payment‐related services) can cause either over‐or underestimation of payer cost sharing. In the present case study, overestimation of the marginal reimbursement incentives was evidenced. Obtaining cost‐sharing estimates that can be used to evaluate alternative payment classification systems requires controlling for endogenous changes in hospital behavior.