Evaluating financial risk in the Medicare Prospective Payment System

Maqbool Dada, William D. White

Research output: Contribution to journalArticlepeer-review


The Medicare Prospective Payment System (PPS) is analogous to an insurance scheme in which financial risk is mitigated through experience rating. In addition, risk is also mitigated through reinsurance provisions. Although a provider may not want this reinsurance, participation is mandatory. We develop a framework for evaluating financial risk under the PPS. We use this framework to examine optional reinsurance as an alternative risk mitigation mechanism. We illustrate an application of optional reinsurance using data for Medicare psychiatric inpatient services. Our analysis indicates that viable schemes exist for implementing optional reinsurance as a prospective payment option.

Original languageEnglish (US)
Pages (from-to)316-329
Number of pages14
JournalManagement Science
Issue number3
StatePublished - Mar 1999
Externally publishedYes

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research


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