The long-term objective of this study is to contribute to the containment of health-care costs, especially of mental health care under Medicare. This study will increase the understanding of financial risks associated with prospective payment systems, focussing on outlier payment options. Outlier payment options are of special concern in psychiatric impatient services because of very high variations in treatment costs. Appropriately chosen outlier formulas can significantly reduce the impact of such high variations on financial risk. This will be the first study to examine interactions between break-even probabilities, reserve ratios, and the mean and standard deviation of hospital profits, to evaluate both profit variations and providers' risk of potential losses under various outlier provisions. In a budget-neutral environment, across the board increases in outlier provisions can make some providers worse off. However, providing additional outlier insurance on an optional basis will reduce or leave unchanged risk to all providers. Using 1985 Medicare data, detailed policy simulations will be performed to evaluate various payment options. Financial risk measures will be estimated using the robust statistical technique of bootstrapping. Various scenarios will be evaluated to test hypotheses regarding i) differences in risk with respect to provider characteristics, ii) differences in across the board increases in outlier provisions and optional co-insurance, and iii) properties of alternative techniques for estimating financial risk measures.
