Fairness in prospective payment: a clustering approach

Problems of fairness in prospective payment have existed since the inception of this regulatory method in the early 1980s. While prospective payment ostensibly has sought to reward efficient producers and provide disincentives for inefficient producers of health care, many hospitals have been penalized financially as a consequence of facing systematic factors beyond their control. This article defines homogenous peer groups of Department of Veterans Affairs providers for the purpose of establishing competitive prospective reimbursement rates. An econometric analysis classifies hospitals into six categories: small affiliated, small general, midsize affiliated/tertiary, large affiliated/tertiary, midsize general, and psychiatric. The Department of Veterans Affairs adopted this classification to alter its prospective payment system in 1988.