Redefining the hospital-physician relationship under prospective payment.

In response to the rapid increases in the costs of health care in the 1970s and early 1980s, the Medicare prospective payment system (PPS) now places hospitals at financial risk for services provided to their Medicare patients. Although hospital boards and administrators can pursue a variety of steps to reduce the cost of care, the hospital must ultimately rely on its medical staff for fundamental change. This paper describes the incentive conflicts that face hospitals and physicians as a result of PPS and identifies a series of options with which hospitals and their medical staff members can resolve the conflict.