Hospital non-price competition under the Global Budget Payment and Prospective Payment Systems

Abstract

This paper provides theoretical analyses of two alternative hospital payment systems for controlling medical cost: the Global Budget Payment System (GBPS) and the Prospective Payment System (PPS). The former method assigns a fixed total budget for all healthcare services over a given period with hospitals being paid on a fee-for-service basis. The latter method is usually connected with a fixed payment to hospitals within a Diagnosis-Related Group. Our results demonstrate that, given the same expenditure, the GBPS would approach optimal levels of quality and efficiency as well as the level of social welfare provided by the PPS, as long as market competition is sufficiently high; our results also demonstrate that the treadmill effect, modeling an inverse relationship between price and quantity under the GBPS, would be a quality-enhancing and efficiency-improving outcome due to market competition.

Keywords::

• Global Budget Payment System
• non-price competition
• Prospective Payment System
• treadmill effect

Acknowledgements

The authors would like to thank JwoLeun Lee and Lin Lin for helpful comments in this study. The usual caveat applies.

Financial & competing interests disclosure

The authors have no relevant affiliations or financial involvement with any organization or entity with a financial interest or financial conflict with the subject matter or materials discussed in the manuscript. This includes employment, consultancies, honoraria, stock ownership or options, expert testimony, grants or patents received or pending, or royalties.

No writing assistance was utilized in the production of this manuscript.