Patient Dumping, Outlier Payment, and Optimal Healthcare Payment Policy under Asymmetric Information

We analyze the rationale for official authorization of patient dumping in the prospective-payment policy framework. We show that when the insurer designs the healthcare payment policy to let hospitals dump high-cost patients, there is a trade-off between the disutility of dumped patients (changes in hospitals' rent extracting due to low-severity patients) and the shift in the cost-reduction effort level for high-severity patients. We also clarify the welfare-improving conditions by allowing hospitals to dump high-severity patients. Finally, we show that if the efficiency of the cost-reduction effort varies by much and the healthcare payment cost is large, or if there exist many private hospitals, the insurer can improve social welfare in a wider environment.