Information Disclosure and the Equivalence of Prospective Payment and Cost Reimbursement

Abstract

A health care provider chooses medical service quality and cost-reduction effort. Both choices are non-contractible. An insurer observes both quality and cost effort, and may credibly disclose them to consumers. In prospective payment, the insurer fully discloses care quality, and sets a prospective payment price. In cost reimbursement, the insurer discloses a value index, a weighted average of quality and cost effort, and pays a margin above cost. The first-best quality and cost effort can be implemented by prospective payment and by cost reimbursement.