McMillan and three anonymous referees for helpful comments, and to the National Institutes on Public opinion surveys uniformly show low support for medical care systems in developed countries. The longstanding conflict between equal access to care and efficient service provision partly explains this dissatisfaction. But the tradeoff is particularly acute in medical care, as new technologies developed over time have increased the cost of care and made the equity commitment even more expensive. Countries first dealt with rising costs by maintaining equal access and restricting total spending. Efficiency suffered, however. As a result, many countries are considering a move away from spending controls and towards incentive-based medical care reform.

Public opinion surveys uniformly show low support for medical-care systems in developed countries. The longstanding conflict between equal access to care and efficient service provision partly explains this dissatisfaction. But the trade-off is particularly acute in medical care, as new technologies developed over time have increased the cost of care and made the equity commitment even more expensive. Countries first dealt with rising costs by maintaining equal access and restricting total spending. Efficiency suffered, however. As a result, many countries are considering a move away from spending controls and toward incentive-based medical-care reform.

This paper examines the effect on health outcomes of moving from cost-based to prospective reimbursement of hospitals. The paper reaches two conclusions. First, hospitals that experienced average price declines had a greater share of deaths occur in the hospital or shortly after discharge. By one year postdischarge, however, this increased mortality was eliminated. Second, there was an increase in readmission rates as hospitals were no longer reimbursed for marginal units of care they provided. This increased readmission appears to be due to accounting changes on the part of hospitals rather than changes in patient morbidity. Copyright 1995 by The Econometric Society.