The Incidence of Adverse Medical Outcomes Under Prospective Payments

David M. Cutler

NBER Working Paper No. 4300
Issued in March 1993
NBER Program(s):Public Economics, Health Care, Aging

This paper examines the effect of prospective payment for hospital care on adverse medical outcomes. In 1983, the federal government replaced its previous cost-based reimbursement method with a prospective payment system, where reimbursement depends only On the diagnosis of the patient. Hospitals thus lost the marginal reimbursement they formally received for providing additional treatments. In addition, the average price each received changed with fixed reimbursement. This paper related each of these changes to adverse outcomes, with two conclusions. First, there is a change in the timing of deaths associated with changes in average prices. In hospitals with price declines, a greater share of deaths occur in the hospital or shortly after discharge, but by one or two years post-discharge, this difference in mortality rates disappears. Second, there is a trend increase in readmission rates caused by the elimination of marginal reimbursement. This appears to be due to accounting changes on the part of hospitals, however, rather than true changes in morbidity.

download in pdf format
   (3078 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4300

Published: Econometrica, February 1995, pp. 29-50 citation courtesy of

Users who downloaded this paper also downloaded* these:
Currie and Gruber w5985 The Technology of Birth: Health Insurance, Medical Interventions, and Infant Health
Gaynor w12301 What Do We Know About Competition and Quality in Health Care Markets?
Einav, Finkelstein, and Schrimpf w19393 The Response of Drug Expenditures to Non-Linear Contract Design: Evidence from Medicare Part D
Cutler and Zeckhauser Adverse Selection in Health Insurance
McClellan Medicare Reimbursement and Hospital Cost Growth
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us