What is Cost Allocation

The goal of this chapter is to illustrate two mathematical game theory concepts for allocating costs (savings) between cooperating participants, specifically in healthcare settings. These concepts are the nucleolus and the Shapley value. The focus of this chapter is on the practical application of the Shapley value for the cost sharing within the bundled payments model for the episodes of care mandated recently by the Center for Medicare Services (CMS). The general Shapley value methodology is illustrated, as well as an important particular case in which each participant uses only a portion of the largest participant's asset (the so-called airport game). The intended readers are primarily leaders of organizations and hospitals involved in the implementation of the CMS-mandated bundled payment model for the episodes of care.