Hospital cost incentives in a fragmented health care system

During the mid-1980s, hospital prospective payment regulation was associated with major changes in medical practice, resulting in initially significant reductions in the rate of growth of inpatient costs. More recently, the rate of growth of hospital costs has returned to historic levels, yet most hospitals have been reluctant to intensify their economic monitoring of physicians. Using data from a large teaching hospital in the Midwest, this article presents a model of marginal profitability by payor and by relative physician costliness. The results illustrate the mixed incentives for hospitals to reduce costly medical practice variations.