Payer Competition and Cost Shift Ing in Health Care

This paper studies a model in which Puo payers contract with one hospital. True costs per patient are not a possible basis for payment, and contracts can only be zuritten on the basis of allocated cost. Payers choose a contract that is fully prospective or fully based on cost allocation, or n paynient scheme that zuould give some weight to eack of these two. We ckaracterize the payers‘ equilibrium contracts arid skow how in equilibrium hospital input decisions are distorted by the payers’ incentives to engage in cost shifting. Two costshifting incentives work in opposite directions, and equilibrium can be characterized by too little or too much care relative to the socially efficient level.