The production of health care services and changing hospital reimbursement. The role of hospital-medical staff relationships.

The production of health care services has the unique feature that physicians do not face explicit costs for hospital inputs. This paper develops models of the production process given alternative hospital and medical staff relationships, and analyzes the impact of the change in hospital reimbursement under Medicare from a cost-based system to the Prospective Payment System (PPS). A basic theoretical result finds that the switch to PPS forces physicians to alter their input mix, changing both physician and hospital income. The effects of the introduction of PPS on hospital inputs, physician income, and hours of work are empirically examined.