Collaborative production and resource allocation: the consequences of prospective payment for hospital care.

This article presents a model of the intensity of care provided by hospitals and physicians and how such intensity was affected by the change to prospective payment by Medicare. Prospective payment introduced an incentive for hospitals to shorten average length of stay, but in order to keep the patient recovery level constant, intensity of inpatient care was forced to increase. Physicians reacted to hospital changes by increasing their own intensity of care provided to inpatients. Implications of the model for admissions and physician office time are also explored. Empirical results indicate that for the period 1983-1987, spanning the introduction of PPS, both hospital and physician intensity of care per inpatient rose significantly.