''Profits'' in Hospital Laboratories

Provides a theoretical and empirical analysis of the effects of cost-based reimbursement (CBR) by Medicare for hospital services. With cost-based reimbursement, accounting costs become a price charged to cost-paying patients and are subject to optimization. The theoretical analysis shows how the CBR formula creates incentives for hospitals to raise charges to charge-paying (private) patients and to manipulate accounting costs to maximize revenue. Data from California hospitals tend to support these conclusions. Accounting "profits," which reflect relative prices to charge and cost-paying patients, show charges in excess of costs in the laboratory but not for the hospital as a whole. Laboratory costs are lower in for-profit than in voluntary hospitals, but there is no difference in total operating costs. The data support the hypothesis that laboratory charges are constrained by competition and nonzero demand elasticity, but day service charges are not.