Ownership Structure and Provider Behavior ∗

In a theoretical model, we study how for-proÞt, nonproÞt, and public providers respond to a prospective payment system (similar to the DRG system used by Medicare in the United States) in a static game when costs are uncertain. For-proÞts default in high-cost states, provide minimum quality in low-cost states, and have a relatively high incentive to invest in cost reduction. Public providers, enjoying soft budget constraints, always deliver care to patients, but have lower incentives to invest. NonproÞts default as often as for-proÞts, but provide higher quality in low-cost states. Their incentives to invest may be higher than for-proÞts or lower than public providers, depending on the weights in the nonproÞt’s objective function. We also study the effect of extending the game to allow for elastic patient demand, quality competition, and multi-period play. ∗The authors thank AHRQ for Þnancial support and David Laibson and John Lindsey for helpful commments. †Eggleston, Tufts University, [email protected]; Miller, Harvard University, nolan [email protected]; Zeckhauser, Harvard University and NBER, richard [email protected].