| Course | WMBA 6602 Contemporary Topics in the U.S. Healthcare Delivery System |
|---|---|
| Week | Week 2 |
| Paper type | Historical comparison paper |
| Length | About 1,060 words, 6 pages |
| Format | APA 7 student paper |
| School | Walden University |
| Program | Master of Business Administration (MBA) |
| Updated | October 2026 |
Free sample paper for WMBA 6602 Week 2
Who Carried the Cost Risk: The Cost-Reimbursement Era Before 1983 Set Against Medicare's Prospective Payment Years, and What Moved When the Risk Shifted From Payer to Hospital
Student Name
Walden University
WMBA 6602: Contemporary Topics in the U.S. Healthcare Delivery System
Instructor Name
Month Day, Year
Who Carried the Cost Risk: The Cost-Reimbursement Era Before 1983 Set Against Medicare's Prospective Payment Years, and What Moved When the Risk Shifted From Payer to Hospital
The Argument
American healthcare history is usually told as a sequence of laws. This paper sets two eras side by side and asks one question of each: when a hospital stay cost more than expected, who paid? The answer changed in 1983, and much of what hospitals did over the following decades followed from that change. The argument is that the shift of cost risk from payers to hospitals, through Medicare's prospective payment system, did more to reshape hospital behavior than any change in who was insured.
The First Era: Cost-Based Payment
Before 1983, hospitals were paid mostly after the fact for whatever their care had cost. Private insurance spread after World War II, much of it through Blue Cross plans that reimbursed hospitals for their costs or billed charges, and commercial indemnity policies that reimbursed patients for a share of their bills (Starr, 1982). When Medicare began paying hospitals in 1966, it adopted the same logic, reimbursing hospitals for their reasonable costs of treating beneficiaries.
Under cost reimbursement, the payer carried the cost risk. If a patient stayed eight days instead of five, or received more tests, the hospital's costs rose and its payment rose with them. Hospitals had little financial reason to shorten stays or limit services, and some reason to add them, since new equipment and staff could be recovered through higher allowable costs. Mayes (2007) described how Medicare's spending on hospitals grew rapidly through the 1970s as a direct consequence of this design, and how attempts to cap costs through regulation largely failed.
The Second Era: Prospective Payment
The Social Security Amendments of 1983 replaced cost reimbursement for Medicare inpatient care with a fixed payment per admission, fixed beforehand by the diagnosis-related group into which the stay was classified. A hospital that treated a patient for less than the group's payment kept the difference; one that spent more absorbed the loss. Cost risk for each stay moved from Medicare to the hospital.
What Moved When the Risk Moved
The response was quick and large. Feder et al. (1987), comparing hospitals under the new system with those still paid on costs in its first years, found that hospitals under prospective payment held down increases in Medicare costs and saw greater declines in Medicare use, earning margins the new system allowed. Several changes followed from the same incentive.
Table 1
The Two Eras Compared
| Feature | Cost-based era (to 1983) | Prospective payment era (from 1983) | |
|---|---|---|
| How the hospital is paid for a Medicare stay | Reasonable costs, after the fact | Fixed amount per admission by diagnosis group | |
| Who bears the cost of a longer or costlier stay | The payer | The hospital | |
| Hospital incentive on length of stay | Little reason to shorten | Strong reason to shorten | |
| Incentive on services within a stay | Add services; costs are recovered | Limit services; each adds cost, not revenue | |
| Where care moved | Stayed inside the hospital | Toward outpatient and post-acute settings | |
Summary drawn from Starr (1982), Feder et al. (1987) and Mayes (2007).
Lengths of stay fell, because each additional day now cost the hospital without raising its payment. Care moved out of the inpatient setting: tests that had been done during admissions shifted to outpatient visits before admission, and recovery shifted to skilled nursing facilities and home health, settings still paid separately at the time. Hospitals invested in cost accounting and in coding, because accurate diagnosis coding determined which payment group, and therefore which fixed price, a stay received.
Feder et al. (1987) also found that the more tightly the new rates constrained a hospital's revenue, the more it slowed the growth of its Medicare costs, and Hodgkin and McGuire (1994) later examined how the level of the fixed payment itself shapes hospital responses. That sharpens the argument. It was not prospective payment as a label that changed behavior, but the transfer of cost risk at a price that bit.
How Hospital Management Changed
The transfer of risk also changed who ran hospitals and what they measured. Under cost reimbursement, the finance office's main task was to document allowable costs. Under fixed payment, hospitals needed to know what each stay cost and how that compared with its payment, which pushed them to build case-level cost accounting and to give physicians data on their own lengths of stay. Utilization review and discharge planning grew from administrative afterthoughts into core functions. Mayes (2007) describes how the new system gave hospital administrators both a reason and a means to question clinical practice patterns, a change in internal power that outlasted the original rates.
@before ## Why the Comparison Matters Now
The Limits of the Comparison
Comparing two eras makes the change look cleaner than it was. Other forces were at work in the same years, including growth in outpatient technology, the spread of health maintenance organizations and tighter state rate regulation in some places, and not every decline in stays can be credited to the fixed payment. Hodgkin and McGuire (1994) show that the hospital response depended on how generous the payment level was, which means the lesson is conditional: moving risk changes behavior when the price is set tightly enough to matter. The comparison also covers Medicare only, while commercial payers continued paying many hospitals on charges for years.
What Did Not Move
The shift did not change who was insured, and it did not cover outpatient care, physicians or post-acute services, which remained paid largely by fee or cost for years afterward. Some of the inpatient savings therefore reappeared as growth in those other settings. The risk had moved, but only for one part of the episode of care, and the parts left outside the fixed payment grew.
Why the Comparison Matters Now
Every later reform, from capitation in managed care to bundled payments and accountable care contracts, is a variation on the same question this paper asks: who carries the risk when care costs more than expected, and over what span of care? The prospective payment era showed that moving that risk changes behavior fast, and that care moves toward whatever lies outside the boundary of the fixed payment. A manager reading a new payment contract should ask where its boundary lies before asking anything else.
References
Feder, J., Hadley, J., & Zuckerman, S. (1987). How did Medicare's prospective payment system affect hospitals? New England Journal of Medicine, 317(14), 867-873. https://doi.org/10.1056/NEJM198710013171405
Hodgkin, D., & McGuire, T. G. (1994). Payment levels and hospital response to prospective payment. Journal of Health Economics, 13(1), 1-29. https://doi.org/10.1016/0167-6296(94)90002-7
Mayes, R. (2007). The origins, development, and passage of Medicare's revolutionary prospective payment system. Journal of the History of Medicine and Allied Sciences, 62(1), 21-55. https://doi.org/10.1093/jhmas/jrj038
Starr, P. (1982). The social transformation of American medicine. Basic Books.
Reading the WMBA 6602 Week 2 instructions
This history week turns American healthcare's past into an argument rather than a timeline. Students set two eras side by side, most often the indemnity and cost-reimbursement decades against the prospective payment years that began in 1983, and ask which party carried cost risk in each and what changed when that risk moved. Instructors expect a precise description of how payment worked in each era, evidence of how hospitals responded and an explanation of what the change did not reach. A comparison table helps. A strong paper ends by connecting the historical lesson to current payment reforms, showing that the question of who bears cost risk still organizes debates over bundled payments and accountable care contracts.
How the WMBA 6602 Week 2 example is put together
The paper states its argument about cost risk first. A section on the first era describes Blue Cross reimbursement, indemnity policies and Medicare's reasonable-cost payment, citing Starr and Mayes, and explains why hospitals had little reason to limit stays. A section on the second era describes fixed payments per admission from 1983. A section on what moved draws on Feder and colleagues, who found hospitals under the new system held down Medicare cost growth, and traces shorter stays, care moving outside the hospital and investment in coding, with a comparison table. It adds Hodgkin and McGuire on payment levels. A section on what did not move notes outpatient, physician and post-acute care outside the fixed payment. A closing section applies the lesson to newer reforms. Margin comments flag the first era, the movement and the limits.
Where the marks sit in the WMBA 6602 Week 2 rubric
Graders reward an argument organized around a clear question, here who carried cost risk, rather than a chronological survey. Describing each era's payment mechanism accurately carries weight, as does supporting claims about hospital responses with evidence. Explaining what the change did not affect, and where costs reappeared, shows depth. Connecting the history to present-day payment debates demonstrates why the comparison matters. A comparison table that summarizes both eras on the same features helps the reader. Instructors also check dates and program details for accuracy. Well-organized prose and correctly formatted citations to historical and empirical sources complete the assessment.
Common WMBA 6602 Week 2 mistakes, and how to avoid them
Choose two eras and write down, for each, how a hospital was paid for a stay and who absorbed the cost when the stay ran long. Find evidence of how hospitals behaved under each. Ask what changed when the risk moved, and what stayed outside the change. Students often lose marks by writing a list of laws and dates, by describing eras without explaining incentives or by overstating what one reform achieved. Another frequent gap is ignoring where spending reappeared after a reform. Use a table to set the eras side by side. End by linking the lesson to a current reform. If you would like a custom sample comparison of payment eras, send us the eras your course assigns.
Get a WMBA 6602 Week 2 example written to your instructions
Attach the Week 2 instructions, your rubric and any assigned readings to a request, and a matched comparison paper arrives within 24 to 48 hours at no charge the first time. Classrooms that name the two eras rather than leaving the pair open should say which ones, so the sample argues the assigned match.
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WMBA 6602 Week 2 questions, answered
Where can I find a free WMBA 6602 Week 2 sample paper?
The payment eras comparison, from cost reimbursement to prospective payment, is published in full here.
Who carried cost risk before 1983?
The payer, because hospitals were reimbursed for their reasonable costs after the fact.
What changed in 1983?
Medicare began paying a fixed amount per admission by diagnosis group, moving cost risk to hospitals.
How did hospitals respond?
They shortened stays, shifted care to outpatient and post-acute settings and invested in coding.
What did the change not reach?
Outpatient care, physicians and post-acute services, where some spending reappeared.