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.

What Explains Differences in Smoking, Drinking, and Other Health-Related Behaviors? by David M. Cutler and Edward Glaeser. Published in volume 95, issue 2, pages 238-242 of American Economic Review, May 2005