After the Medicare program adopted the Prospective Payment System (PPS), researchers observed that people tended to receive less care for any given diagnosed condition.
a. One explanation for this finding is that the PPS provides incentives to provide lower levels of treatment for any given diagnosis. Why would PPS provide these incentives?
b. Another explanation for this finding is that PPS offers incentives for physicians to diagnose marginal health conditions as more serious than they are. Why would PPS provide these incentives?
c. Since this reduction in quantity of care was not accompanied by a reduction in observable health outcomes, what, if anything, can you infer about the efficiency of the Medicare program before the policy change? Explain your answer.