Using the model of Banks, Parker, and Wendel (2001), we analyze how the design of payment systems affects the strategic interaction between sequential health care providers. We find that this model explains why the implementation of prospective payments led to reduced efficiency and increased vertical integration, and why expanding prospective payments to all providers will not solve the problem.
... [Show full abstract] We then consider the impact of bundled payments, and find that efficiency will be improved, and the motive for vertical integration reduced, under only one of three alternative bundled payment systems. ABSTRACT: We then consider the impact of bundled payments, and find that efficiency will be improved, and the motive for vertical integration reduced, under only one of three alternative bundled payment systems.