Health-Care Payment Systems: Cost and Quality Incentives—Comment

This note analyzes the incentives for cost reduction that different payment policies provide to profit-maximizing health-care providers. Ching-to Albert Ma (1994) proposes a reimbursement mechanism that seeks to induce first-best cost reduction by using a combination of cost reimbursement and prospective payment in a model where higher effort on the part of the health-care provider reduces treatment costs. This note shows that a mechanism of this type, generally, will not result in first-best cost reduction. However, such a mechanism is optimal when the payer has efficiency and distributional concerns.     

Efficiency in an Economy with Fixed Costs

It is by now well known that in an economy with increasing returns, first-best efficiency may be impossible to attain through an equilibrium concept based on market prices, even if firms are regulated to follow marginal cost pricing. We examine the efficiency issue in a special but important class of economies in which the only source of nonconvexities is the presence of fixed costs. Even in this context, it is possible that none of the equilibria based on marginal cost pricing are efficient (unless additional, strong assumptions are made). We argue that available results on the existence of an efficient two-part tariff equilibrium rely on very strong assumptions, and we provide a positive result using a weak surplus condition. Our approach can also be used to establish the existence of an efficient marginal cost pricing equilibrium with endogenously chosen lump-sum taxes if the initial endowment is efficient in the economy without the production technology.     

Performance Impact of the Elimination of Direct Labor Variance Reporting: A Field Study

Using a field study approach, we examine two competing perspectives on direct labor variance reporting: some argue that direct labor variance reporting is costly and cumbersome, and should be eliminated; whereas others contend that without direct labor variance information, managers will not be able to monitor workers effectively, causing workers to shirk and worker productivity to decline. Specifically, we investigate the productivity and quality impacts of eliminating direct labor variance reporting with panel data containing 36 months of data from seven experimental plants that eliminated direct labor variance reporting and 11 control plants that did not. The experimental plants experienced a significant decline in labor productivity compared to the control plants. Also, the experimental plants showed an improvement in product quality, indicating that workers reallocate their efforts to other tasks as a result of the change in the information set available to evaluate them.     

PERHAPS EVA DOES BEAT EARNINGS—REVISITING PREVIOUS EVIDENCE

In two articles, the first published in 1997 in the Journal of Accounting and Economics and the second in 1999 in this journal, Gary Biddle, Robert Bowen, and James Wallace presented evidence that reported earnings are more closely related than EVA to marketadjusted stock returns– in other words, that earnings are more “value relevant” than EVA. These papers, which are among the most widely cited in finance and accounting, fundamentally affected perceptions about the importance of EVA as a measure of corporate performance. The current article addresses a simple question: Do the Biddle, Bowen, and Wallace results continue to hold for a different set of companies, a different time period, and a different market? The authors first examined updated EVA information for different companies in the same time period examined in the Biddle, Bowen, and Wallace study. They then looked at a more recent time period (1995–1999) and a different market (the Canadian stock market), and found in all cases that “EVA has greater power than earnings in explaining marketadjusted stock returns.” Their findings validate the widespread corporate acceptance of EVA as a management tool.     

Nash implementation through elementary mechanisms in economic environments

This paper identifies a class of mechanisms, called elementary mechanisms, which are (in a precisely defined sense) the “simplest” mechanisms that can implement efficient outcomes in economic environments. The class of social choice correspondences that can be implemented by elementary mechanisms is completely characterized in a variety of different economic contexts.     

Short-term fluctuations in hospital demand: implications for admission, discharge, and discriminatory behavior

We analyze admission and discharge decisions when hospitals become capacity constrained on high-demand days, and develop a test for discrimination that, under certain circumstances, does not require controls for differences across patient groups. On high-demand days, patients are discharged earlier than expected compared to those discharged on low-demand days. High demand creates no statistically significant differences in hospitals' admission behavior. Thus, hospitals appear to ration capacity by hastening discharges rather than by restricting admissions. We could not reject a null hypothesis of no discrimination against Medicaid patients in discharges