ABSTRACT
The Diagnosis-Related Grouping based Prospective Payment System (PPS) for reimbursement of medical costs of Medicare patients was enacted in 1983 by the federal government as a means of cost containment. The results of the analysis show that PPS did have a significant impact on the hospitals costs. The reason that the government legislated the PPS scheme of reimbursement was ostensibly cost containment. Zimmerman suggests that hospitals invested in sophisticated computer systems after the implementation of PPS in order to find the most suitable cost allocation structure. Hospital administration would prefer to acquire information technology and other capital required for administration whereas physicians would prefer to acquire medical equipment. Administrators wanted to attract the best physicians to the hospitals and one way to do this was to acquire the best medical technology. The hypotheses listed above can be tested if a function can be derived that relates total costs to prices of input factors and to time and output quantity.
