This paper analyzes the role of interhospital nonprice competition in Medicare's Prospective Payment System. Competition can play an important role both by increasing quality and reducing managerial slack. The quality-enhancing aspect of competition can be amplified through reimbursement of a proportion of incurred cost. As competition intensifies, the optimal degree of cost sharing (subsidy) falls.
Hospital nonprice competition and medicare reimbursement policy
Pope, G. (1989). Hospital nonprice competition and medicare reimbursement policy. Journal of Health Economics, 8(2), 147-172. https://doi.org/10.1016/0167-6296(89)90001-5