Hospital Competition with Soft Budgets : Hospital competition with soft budgets

Reimbursement incentives influence both the intensity of services and who is treated when patients differ in severity of illness. The social optimum is compared to the private Cournot-Nash solution for three provider strategies: creaming--over-provision of services to low severity patients; skimping--under-provision of services to high severity patients; and dumping--the explicit avoidance of high severity patients. Cost-based reimbursement results in overprovision of services (creaming) to all types of patients. Prospectively paid providers cream low severity patients and skimp high severity ones. If there is dumping of high severity patients, then there will also be skimping.