E2026005                2026-02-08

Zhi Cao  Wei Yan  Junjian Yi  Chuanchuan Zhang  Hang Zou

Abstract

Prospective payment policies, which set a fixed payment for a bundle of services regardless of providers’ actual costs, are widely used across sectors. However, when the fixed payment level deviates from providers’ familiar, preexisting revenue, the introduction of such policies may induce behavioral distortions if providers exhibit reference-dependent preferences. This study investigates the optimal payment level under this policy by leveraging the healthcare context. We develop a collective model of medical decision-making, and incorporate physicians’ reference-dependent preferences into this collective framework. Our structural estimates reveal that both patients and physicians play active roles in medical decisions, with physicians placing 3.5 times more weight on perceived losses than gains. The fixed payment level, by shaping physicians’ perceptions of gains and losses, crucially affects both treatment and welfare outcomes. Through welfare analysis, we derive the optimal payment level that reduces healthcare expense while maintaining patient health benefits.

Keywords: Reference-dependent preferences; prospective payment scheme; collective decisions

JEL codes: D90, D70, H51, I11