Payer Competition and Cost Shifting in Health Care

Jacob Glazer*, Thomas G. McGuire

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


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

Original languageEnglish
Pages (from-to)71-92
Number of pages22
JournalJournal of Economics and Management Strategy
Issue number1
StatePublished - Mar 1994


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