The Impact of Public Health Care Financing Policies on Private-Sector Hospital Costs

Two of the best-known economic models of hospital behavior are utilized to examine theoretically the issue of cross-subsidization of hospital costs between public and private-pay patients. It is shown that the existence of public/private hospital-charge differentials does not, in itself, demonstrate that public programs are subsidized by the private sector. This differential is to be expected, whether hospitals are considered to be monopolistic profit maximizers or controlled by physicians. While cost-based hospital reimbursement may be dynamically inefficient, it is shown to have certain static efficiency properties when hospitals provide services to both public and private patients.