Reimbursing for Health Care Services

The literature on contracting has focused on the power of the contract and especially the mix of fixed price and cost reimbursement type contracts. For health care services there is the additional issue of what the base of any fixed price contract should be; e.g., for hospitalized patients, per day, per stay, or per episode (including post acute care). More aggregate bases are more powerful. I suggest that more aggregate bases are more likely optimal, the less independent are various inputs (typically, the more substitutable). I illustrate with the experience of the American Medicare program. (January 2003)