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Strategic interaction among hospitals and nursing facilities: the efficiency effects of payment systems and vertical integration

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  • Dwayne Banks
  • Elliott Parker
  • Jeanne Wendel

Abstract

Rising post‐acute care expenditures for Medicare transfer patients and increasing vertical integration between hospitals and nursing facilities raise questions about the links between payment system structure, the incentive for vertical integration and the impact on efficiency. In the United States, policy‐makers are responding to these concerns by initiating prospective payments to nursing facilities, and are exploring the bundling of payments to hospitals. This paper develops a static profit‐maximization model of the strategic interaction between the transferring hospital and a receiving nursing facility. This model suggests that the post‐1984 system of prospective payment for hospital care, coupled with nursing facility payments that reimburse for services performed, induces inefficient under‐provision of hospital services and encourages vertical integration. It further indicates that the extension of prospective payment to nursing facilities will not eliminate the incentive to vertically integrate, and will not result in efficient production unless such integration takes place. Bundling prospective payments for hospitals and nursing facilities will neither remove the incentive for vertical integration nor induce production efficiency without such vertical integration. However, bundled payment will induce efficient production, with or without vertical integration, if nursing facilities are reimbursed for services performed. Copyright © 2001 John Wiley & Sons, Ltd.

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  • Dwayne Banks & Elliott Parker & Jeanne Wendel, 2001. "Strategic interaction among hospitals and nursing facilities: the efficiency effects of payment systems and vertical integration," Health Economics, John Wiley & Sons, Ltd., vol. 10(2), pages 119-134, March.
  • Handle: RePEc:wly:hlthec:v:10:y:2001:i:2:p:119-134
    DOI: 10.1002/hec.585
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    References listed on IDEAS

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    Cited by:

    1. Christopher Afendulis & Daniel Kessler, 2011. "Vertical Integration and Optimal Reimbursement Policy," NBER Working Papers 17316, National Bureau of Economic Research, Inc.
    2. Guilherme C. Amado & Diogo C. Ferreira & Alexandre M. Nunes, 2022. "Vertical integration in healthcare: What does literature say about improvements on quality, access, efficiency, and costs containment?," International Journal of Health Planning and Management, Wiley Blackwell, vol. 37(3), pages 1252-1298, May.
    3. Pedro P. Barros & Xavier Martinez-Giralt, 2002. "Preventive health care and payment systems to providers," UFAE and IAE Working Papers 507.02, Unitat de Fonaments de l'Anàlisi Econòmica (UAB) and Institut d'Anàlisi Econòmica (CSIC).
    4. Becker, David & Kessler, Daniel & McClellan, Mark, 2005. "Detecting Medicare abuse," Journal of Health Economics, Elsevier, vol. 24(1), pages 189-210, January.
    5. David Becker & Daniel Kessler & Mark McClellan, 2004. "Detecting Medicare Abuse," NBER Working Papers 10677, National Bureau of Economic Research, Inc.
    6. Christopher Afendulis & Daniel Kessler, 2011. "Vertical integration and optimal reimbursement policy," International Journal of Health Economics and Management, Springer, vol. 11(3), pages 165-179, September.

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