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Do Diagnosis-Related Group-Based Payments Incentivise Hospitals to Adjust Output Mix?
Abstract
This study investigates whether the diagnosis-related group (DRG)-based payment method motivates hospitals to adjust output mix in order to maximise profits. The hypothesis is that when there is an increase in profitability of a DRG, hospitals will increase the proportion of that DRG (own-price effects) and decrease those of other DRGs (cross-price effects), except in cases where there are scope economies in producing two different DRGs. This conjecture is tested in the context of the case payment scheme (CPS) under Taiwan's National Health Insurance programme over the period of July 1999 to December 2004. To tackle endogeneity of DRG profitability and treatment policy, a fixed-effects three-stage least squares method is applied. The results support the hypothesised own-price and cross-price effects, showing that DRGs which share similar resources appear to be complements rather substitutes. For-profit hospitals do not appear to be more responsive to DRG profitability, possibly because of their institutional characteristics and bonds with local communities. The key conclusion is that DRG-based payments will encourage a type of 'product-range' specialisation, which may improve hospital efficiency in the long run. However, further research is needed on how changes in output mix impact patient access and pay-outs of health insurance. Copyright © 2014 John Wiley & Sons, Ltd.
... The way in which public hospitals are financed plays a very important role in their efficient and safe operation and, by extension, in the services that patients receive. Activity-based funding under the DRG system has been linked to various impacts on both the quality of services provided [9,10,32] and the finances of insurance providers, both governmental and non-governmental, that reimburse hospitals for health services [5,8,32,33]. In addition, implementing activity-based reimbursement reforms for a country's public hospitals is an incredibly complex process requiring the following: organizational commitment; adequate infrastructure; human, financial and information technology resources; change champions and a personal commitment to quality care [11]. ...
... The way in which public hospitals are financed plays a very important role in their efficient and safe operation and, by extension, in the services that patients receive. Activity-based funding under the DRG system has been linked to various impacts on both the quality of services provided [9,10,32] and the finances of insurance providers, both governmental and non-governmental, that reimburse hospitals for health services [5,8,32,33]. In addition, implementing activity-based reimbursement reforms for a country's public hospitals is an incredibly complex process requiring the following: organizational commitment; adequate infrastructure; human, financial and information technology resources; change champions and a personal commitment to quality care [11]. ...
The funding of public hospitals is an issue that has been of great concern to health systems in the past decades. Public hospitals are owned and fully funded by the government, providing in most countries medical care to patients free of charge, covering expenses and wages by government reimbursement. Several studies in different countries have attempted to investigate the potential role and contribution of hospital and clinical data to their overall financial requirements. Many of them have suggested the necessity of implementing DRGs (Diagnosis Related Groups) and activity-based funding, whereas others identify flaws and difficulties with these methods. What was attempted in this study is to find an alternative way of estimating the necessary fundings for public hospitals, regardless the case mix managed by each of them, based on their characteristics (size, specialty, location, intensive care units, number of employees, etc.) and its annual output (patients, days of hospitalization, number of surgeries, laboratory tests, etc.). We used financial and operational data from 121 public hospitals in Greece for a 2-years period (2018–2019) and evaluated with regression analysis the contribution of descriptive and operational data in the total operational cost. Since we had repeated measures from the same hospitals over the years, we used methods suitable for longitudinal data analysis and developed a model for calculating annual operational costs with an R²≈0.95. The main conclusion is that the type of hospital in combination with the number of beds, the existence of an intensive care unit, the number of employees, the total number of inpatients, their days of hospitalization and the total number of laboratory tests are the key factors that determine the hospital’s operating costs. The significant implication of this model that emerged from this study is its potential to form the basis for a national system of economic evaluation of public hospitals and allocation of national resources for public health.
... This adjustment leads to observable own-price and negative cross-price effects. 23 Additionally, hospitals may decrease service intensity per patient through marginal payment and average compensation effects to minimize their cost burden and deter treatment of unprofitable patients. 24 Under the financial incentives of DIP, hospitals strive to maximize target income and surplus for each inpatient case, primarily through competitive point, cost control, and cost shifting. ...
Purpose
China has developed and widely implemented an innovative case-based payment method for inpatient services under a regional global budget, termed the “Diagnosis-Intervention Packet” (DIP). This study aims to examine cost-shifting behaviour in lung cancer inpatient care under the DIP reform.
Methods
This study examines the impact of the DIP reform in Zunyi, a national pilot city, using double machine learning (DML). Specifically, we analyze the effects on the total health expenditures (THS), individual payments excluding reimbursement (IPER), proportion of IPER, copayments for category-B, proportion of copayments for category-B, copayments for category-C and proportion of copayments for category-C per case for LC inpatients in tertiary hospitals.
Results
The results indicate a significant reduction in THS per case after the DIP reform (β = −0.0778, p < 0.001). Following the reform, there was a significant increase in IPER (β = 0.0689, p < 0.05), copayments for category-B (β = 0.1682, p < 0.01), and the proportion of copayments for category-B (β = 0.0039, p < 0.05). Conversely, the proportion of copayments for category-C significantly decreased (β = −0.0108, p < 0.001). Notably, significant heterogeneity in the cost-containment and cost-shifting effects was observed across different hospital categories, teaching types, and insured classifications.
Conclusion
The DIP reform significantly reduced the THS per case for LC inpatients, while shifting in-policy expenditures to IPER. The cost-shifting primarily occurred through the redistribution of copayments from category-C to category-B. It is imperative for policymakers to establish differentiated regulatory policies tailored to various cost categories, hospital types, and insured classifications to optimize the effectiveness of the DIP reform.
... Even in this system, there is space for moral hazards. For example, these include lowering the quality of medical services (Jegers et al., 2002;Paddock et al., 2007), discrimination (Aas, 1995;Ellis, 1998), manipulation of diagnoses (Eichenwald, 2003;Dafny, 2005), focusing on relatively profitable illnesses (Ellis & McGuire, 1996;Gilman, 2000;Liang, 2015;Parkinson et al., 2019) and manipulating short-term hospitalizations (Norton et al., 2002). ...
In this paper, we studied the moral hazard in healthcare. As part of the analysis, we looked at 126.3 thousand hospitalization cases in the Georgian healthcare system in 2018-2019. According to the group of diagnoses, we compared the length of stay of inpatients funded under government programs with the cases covered by a pocket of patients or private insurance companies. As a result of the study, we found that the length of stay under the universal health care program is, on average, 0.26 days (CI 95%; [0.22-0.30]) longer than in other circumstances. The difference is statistically significant (t = -12.58; P<.05). Thus, our result is the empirical evidence of theoretical reasoning that predicts an increase in the moral hazard under the government healthcare program.
... To achieve effective control of medical expenses, 12,13 the NHI implemented in Taiwan follows the international Diagnosis-Related Groups (DRGs) payment system method, modified to suit Taiwan. The payment system of Taiwan's (Tw)-DRGs seeks to achieve effective control by managing application payment and clinical pathways, 7 and to standardize the Code of Medical Conduct to improve the quality of care available to the people and reduce the wastage of medical resources. ...
This study examined the cost of medical insurance for “sepsis” treatment in Taiwan. We applied statistical tests, cost control charts, and C5.0 decision trees using the define, measure, analyze, improve and control (DMAIC) process to mine data on Diagnosis-Related Groups (DRGs) and clinics that reported expense anomalies and disposal costs. Analyzing 353 valid samples (application fees) from four DRGs, 70 clinics, and 15 input variables, abnormalities in application fees for adults (age ≧18 years old) with comorbidities or complications was significant (95% confidence interval) in one DRG and nine clinics. Four input variables (ward charge, treatment fee, laboratory fee, and pharmaceutical service charge) had a significant impact. Improvements or controls should be prioritized for three clinics (Nos. 49, 44, and 14) and two input variables (treatment and laboratory fees). This model can be replicated to ascertain excess medical expenditures and improve the efficiency of medical resource use.
... Another study pointed out that the imbalance between the supply and demand of medical service information is the key reason for the lack of mutual trust between doctors and patients in recent years (56). Strengthening the disclosure of medical service information to meet the information needs of patients can reduce the degree of information asymmetry between doctors and patients and reshape the mutual trust between doctors and patients (57). In addition, Xiaokang et al. (47) and others explored the cognitive mechanism of individuals' perception of medical information Frontiers in Public Health 05 frontiersin.org ...
Introduction
Medical insurance information disclosure is not only a direct way for the public to understand and master social insurance information and resource use benefits, but also an important way for the public to participate in medical service governance and supervision. Some studies have shown that information disclosure can significantly reduce the risk perception of user groups, strengthen their trust and reduce the negative impact of information asymmetry.
Methods
Based on risk perception and trust perception theories, this paper focuses on the mechanisms influencing patients’ attitudes in the process of implementing a Diagnosis Related Groups payment system. Using medical insurance information disclosure from a governance perspective as the research object, the impact of medical insurance information disclosure on patients’ willingness to adopt the Diagnosis Related Groups payment system was analyzed by means of a questionnaire survey, Data analysis and hypothesis testing via SPSS while the mechanism of the impact of medical insurance information disclosure on patients’ attitudes was explored in depth.
Results
It was found that medical insurance information disclosure had a significant positive effect on patients’ trust perceptions and a significant negative effect on patients’ risk perceptions. The more comprehensive information patients received, the stronger their trust and the lower their perceived risk.
Discussion
This paper conducts an empirical study from patients’ perspective, broadens the scope of research on medical insurance Diagnosis related groups, enriches the application of risk perception and trust perception theories in the medical field, and provides management suggestions for medical institutions in the management of medical insurance information disclosure.
... While for-profit hospitals treated AMI patients, including the use of interventional cardiac procedures, similarly to non-profit counterparts in a US study (Shah et al., 2007), did not appear to be more responsive to DRG profitability in Taiwan (Liang, 2015), or produced comparable quality to public hospitals in the UK (Moscelli et al., 2018), most studies found that for-profit status or other types of financial pressures tend to have an impact on care quality or treatment decisions. In California, a higher number of uninsured patients and their uncompensated costs resulted in the increase of the mortality rate of insured heart attack patients (Daysal, 2012). ...
Under Hungary’s single payer health care system, hospitals face an annual budget cap on most of their diagnoses-related group based reimbursements. In July 2012, percutaneous coronary intervention (PCI) treatments of acute myocardial infarction were exempted from that hospital level budget cap. We use countrywide individual-level patient data from 2009 to 2015 to map the effect of such a quasi-experimental change in monetary incentives on health provider decisions and health outcomes. We find that direct admissions into PCI-capable hospitals increase, especially in central Hungary, where there are several hospitals which can compete for patients. The proportion of PCI treatments at PCI-capable hospitals, however, does not increase, and neither does the number of patient transfers from non-PCI hospitals to PCI-capable ones. We conclude that only patient pathways, plausibly influenced by hospital management, were affected by the shift in incentives, while physicians’ treatment decisions were not. While average length of stay decreased, we do not find any effect on 30-day readmissions or in-hospital mortality.
... The DRG data is primarily collected for reimbursement. Although the data underwent plausibility checks for wrong codes before release of DESTATIS to researchers, it cannot be excluded that the coding followed in some cases more the interest of maximizing the profit than a proper documentation of the actual treatment [29]. As the complete data set is subject to this uncontrolled bias, the comparisons between subsets, like the comparisons between men and women or between subsites, are evenly affected by such a bias. ...
Background:
Data on in-hospital MR (IHMR) of head and neck cancer (HNC) are sparse.
Methods:
IHMR was determined in Germany between 2005 and 2018 using nationwide population-based diagnosis-related group (DRG) data of 1,090,596 HNC.
Results:
The overall average IHMR was 0.04 ± 0.02. IHMR increased with older age to 0.04 ± 0.01 for patients of 65-79 years of age (relative risk [RR] in relation to patients of 35-49 years of age = 1.767; 95%confidence interval [CI] = 1.040 to3.001) to a maximum of 0.07 ± 0.01 for patients of 80 years and older (RR = 2.826; CI = 1.663 to 4.803). IHMR was the highest when no HNC-specific treatment, i.e., best supportive and palliative care, was applied (0.11 ± 0.01; RR in relation to tumor biopsy surgery = 7.241; CI = 3.447 to 5.211). IHMR was not different between surgery, radiotherapy, or chemotherapy/biologicals.
Conclusions:
IHMR did not change over time. Efforts are needed to decrease the IHMR for HNC.
... Furthermore, the DRG data is primarily collected for reimbursement. Although the data underwent plausibility checks for incorrect codes before release of DESTATIS to researchers, it cannot be excluded that in some cases the coding followed the interest of maximizing the profit more than a proper documentation of the actual treatment [19]. As the complete dataset is subject to this uncontrolled bias, the comparisons between subsets, such as the comparisons between men and women or between subsites, are evenly affected by such a bias. ...
Advances in head and neck cancer (HNC) treatment might have changed treatment strategies. This study determined, with focus on gender disparity, whether treatment rates have changed for inpatients in Germany between 2005 and 2018. Nation-wide population-based diagnosis-related groups (DRG) data of virtually all HNC cases (1,226,856 procedures; 78% men) were evaluated. Poisson regression analyses were used to study changes of annual treatment rates per German population. For surgery, the highest increase was seen for women with cancer of the oral cavity (relative risk (RR) 1.14, 95% confidence interval (CI) 1.11–1.18, p < 0.0001) and the highest decrease for men with laryngeal cancer (RR 0.90, CI 0.87–0.93). In women with oropharyngeal cancer, the highest increase of radiotherapy rates was seen (RR 1.18, CI 1.10–1.27, p < 0.0001). A decrease was seen in men for hypopharyngeal cancer (RR 0.93, CI 0.87–0.98, p = 0.0093). The highest increase for chemotherapy/immunotherapy was seen for women with oropharyngeal cancer (RR 1.16, CI 1.08–1.24, p < 0.0001), and a decrease in men with hypopharyngeal cancer (RR 0.93, CI 0.88–0.97, p = 0.0014). Treatment patterns had changed for nearly all subsites and therapy types. There were relevant gender disparities, which cannot be explained by the DRG data.
... There is a growing literature that finds ample evidence of overbilling and upcoding among health care providers, including SNFs (Brunt, 2011;Liang, 2015;Lindrooth & Weisbrod, 2007;Silverman & Skinner, 2004). Furthermore, many studies have found evidence that FPs place a larger proportion of patients into the most generous billing codes compared with NFPs (Bowblis, Brunt, & Grabowski, 2016;Silverman & Skinner, 2004). ...
Within the United States, a growing debate about special tax treatment and community benefits provided by not-for-profits (NFPs) has been occurring. While the nondistribution constraint of NFPs is often thought to incentivize higher quality and more charitable care, NFPs may also be used by contractors for personal gain. This study explores whether the use of external contractors by NFP health care providers alter behavior. Using a sample of patients receiving rehabilitative care for hip fractures in skilled nursing facilities, and exploiting variation in ownership and contracting status, this study finds contracting in NFPs results in increased prevalence of profit-maximizing behaviors more commonly associated with FPs. Furthermore, contracting results in more revenue focused care delivery patterns.
... While some of them find no adverse effects in the short-run (Seshamani et al., 2006), others highlight higher mortality rates in the long-run for hospitals facing larger payment cuts (Wu and Shen, 2014). Outside the USA, Liang (2015) estimates the substitution and complementarity across DRGs with different profitability for hospitals under a DRG-based payment scheme in Taiwan. The evidence supports both the hypothesis of positive own-price effects, with an increase in the share of patients for the more profitable DRGs, and of negative cross-price effects. ...
This paper examines the behaviour of public hospitals in response to the average payment incentives created by price changes for patients classified in different diagnosis-related groups (DRGs). Using panel data on public hospitals located within the Italian region of Emilia-Romagna, we test whether a 1-year increase in DRG prices induced public hospitals to increase their volume of activity and whether a potential response is associated with changes in waiting times and/or length of stay. We find that public hospitals reacted to the policy change by increasing the number of patients with surgical treatments. This effect was smaller in the 2 years after the policy change than in later years, and for providers with a lower excess capacity in the pre-policy period, whereas it did not vary significantly across hospitals according to their degree of financial and administrative autonomy. For patients with medical DRGs, instead, there appeared to be no effect on inpatient volumes. Our estimates also suggest that an increase in DRG prices had no impact on the proportion of patients waiting more than 6 months. Finally, we find no evidence of a significant effect on patients' average length of stay. Copyright © 2016 John Wiley & Sons, Ltd.
The National Health Insurance Administration of Taiwan has implemented global budget payments, the Diagnosis-Related Group (DRG) inpatient diagnosis-related group payment system, and the same-disease payment system, in order to decrease the financial burden of medical expenditure. However, the benefit system reduces the income of doctors and hospitals. This study proposed an early warning payment algorithm that applies data analytics technology to diabetes hospitalization- and treatment-related fees. A model was constructed based on the characteristics of the Exponentially Weighted Moving Average (EWMA) algorithm to develop control charts, which were first employed using the 2001–2017 health insurance statistical database released by the Department of Health Insurance (DHI). This model was used to simulate data from inpatients with diabetes, to create an early warning algorithm for diagnosis-related groups’ (DRGs’) medical payments as well as to measure its accuracy. This study will provide a reference for the formulation of payment policies by the DHI.
In 2007, the Centers for Medicare and Medicaid restructured the diagnosis related group (DRG) system by expanding the number of categories within a DRG to account for complications present within certain conditions. This change allows for differential reimbursement depending on the severity of the case. We examine whether this change incentivized hospitals to upcode patients as sicker to increase their reimbursements. Using the National Inpatient Survey data from HCUP from 2005-2010 and three methods to detect the presence of upcoding, our most conservative estimate is an additional three percent of reimbursement is attributable to upcoding. We find evidence of upcoding in government, non-profit, and for-profit hospitals. We find spillover effects of upcoding impacting not only Medicare payers, but also private insurance companies as well.
This paper examines the behaviour of public hospitals in response to the average payment incentives created by price changes for patients classified in different Diagnosis Related Groups (DRGs). Using panel data on public hospitals located within the Italian region of Emilia-Romagna, we test whether a one-year increase in DRG prices induced public hospitals to increase their volume of activity, and whether a potential response is associated with changes in waiting times and/or length of stay. We find that public hospitals reacted to the policy change by increasing the number of patients with surgical treatments. This effect was smaller in the two years after the policy change than in later years, and for providers with a lower excess capacity in the pre-policy period, whereas it did not vary significantly across hospitals according to their degree of financial and administrative autonomy. For patients with medical DRGs, instead, there appeared to be no effect on inpatient volumes. Our estimates also suggest that an increase in DRG prices either decreased or had no impact on the proportion of patients waiting more than six months. Finally, we find no evidence of a significant effect on patients’ average length of stay.
Many publicly funded health systems use activity-based financing to increase hospital production and efficiency. The aim of this study is to investigate whether price changes for different treatments affect the number of patients treated and the mix of activity provided by hospitals. We exploit the variations in prices created by the changes in the national average treatment cost per diagnosis-related group (DRG) offered to Norwegian hospitals over a period of 5 years (2003-2007). We use the data from Norwegian Patient Register, containing individual-level information on age, gender, type of treatment, diagnosis, number of co-morbidities and the national average treatment costs per DRG. We employ fixed-effect models to examine the changes in the number of patients treated within the DRGs over time. The results suggest that a 10% increase in price leads to about 0.8-1.3% increase in the number of patients treated for DRGs, which are medical (for both emergency and elective patients). In contrast, we find no price effect for DRGs that are surgical (for both emergency and elective patients). Moreover, we find evidence of upcoding. A 10% increase in the ratio of prices between patients with and without complications increases the proportion of patients coded with complications by 0.3-0.4 percentage points. Copyright © 2015 John Wiley & Sons, Ltd.
Copyright © 2015 John Wiley & Sons, Ltd.
Post-acute care provided by skilled nursing facilities (SNFs) is reimbursed by Medicare under a Prospective Payment System using resource utilization groups (RUGs) that adjust payment intensity based on predefined ranges of weekly therapy minutes provided and the functionality of the patient. Individual RUGs account for differences in the intensity of care provided, but there exists significant regional variation in the payments SNFs receive from Medicare due to the use of geographic adjustment factors. This paper is the first to use this geographic variation in the generosity of Medicare reimbursement to empirically test if SNFs respond to payment differences between RUG categories. The results are highly suggestive that SNFs upcode patients by providing additional therapy minutes to increase revenue, whereas we find no evidence of upcoding related to patient functionality scores. Simulating how different payment differentials affect RUG selection, we predict that reducing the financial incentive to upcode could have saved Medicare between 1.46 to 2.29 billion dollars in 2005.
The coverage expansions planned under the Affordable Care Act are to be financed in part by slowing Medicare payment updates to hospitals, thereby reigniting the debate over whether low prices paid by public payers cause hospitals to increase prices to private insurers--a practice known as cost shifting. Recently, the Medicare Payment Advisory Commission (MedPAC) proposed an alternative explanation of hospital pricing and profitability that could be used to support policies that pressure hospitals to reduce overall costs rather than to only raise prices. This study evaluated the cost-shift and MedPAC perspectives using 2008 data on hospital margins for 30,514 Medicare and privately insured patients undergoing any of seven major procedures in markets where robust hospital competition exists and in markets where hospital care is concentrated in the hands of a few providers. The study presents empirical evidence that, faced with shortfalls between Medicare payments and projected costs, hospitals in concentrated markets focus on raising prices to private insurers, while hospitals in competitive markets focus on cutting costs. Policy makers need to examine whether efforts to promote clinical coordination through provider integration may interfere with efforts to restrain overall health care cost growth by restraining Medicare payment rates.
Cream skimming can be defined as the selective treatment of patients that demand few resources while providing high economic refunds. We test whether cream skimming occurs after the introduction of DRG-based activity-based financing (ABF) in Norway in 1997 and if the problem further increased after the 2002 organizational reform when hospitals were turned into trusts. The DRG-system offers the same economic reimbursement for patients classified within day-surgical DRGs irrespective of whether the patient receives same-day treatment or in-patient care over several days. This provides potential for cream skimming and allows us to investigate cream skimming within the actual diagnoses. Patient data from the period 1999-2005 is analyzed. Waiting times are used as indicators of patient selection and analyzed as a function of severity within each diagnosis, controlling for age and gender of the patient, as well as institutional and time-dependent variables. The analysis gives some evidence of cream skimming in the first period of ABF, in particular within the lighter orthopaedic diagnoses. However, cream skimming does not increase after the 2002 organizational reform but is stable, and for some DRGs even reduced. The study indicates that cream skimming may occur if reimbursement systems are not particularly sophisticated. Softening of budget constraints after the hospital reform of 2002 may explain why cream skimming does not increase after the reform. However, further investigation into this mechanism is needed.
Medicare Part B pays outpatient physicians according to the billed Current Procedural Terminology (CPT) codes, which differ in procedure and intensity. Since many performed services merely differ by intensity, physicians have an incentive to upcode services to increase profitability of a visit. Using nationally representative data from the 2001 to 2003 Medicare Current Beneficiary Survey, this paper explores the effect of Medicare Part B fee differentials on the upcoding of general office visits (i.e. for established patient visits with CPT codes of 99212-99215). It finds strong evidence that these fee differentials influence physician's coding choice for billing purposes across a variety of specialties. For general office visits, Medicare outlays attributable to upcoding may sum to as much as 15% of total expenditures for such visits. Medicare has much to gain financially by clarifying its classification rules. Until the distinctions between types of Medicare visits are redefined in a way that eliminates ambiguity, upcoding under Medicare Part B is likely to continue.
Past research on the potentials for cost-saving scale and scope economies in multiproduct HMO operations in the United States are incomplete in their economics of the underlying technology structure. This article exploits the translog cost model estimates of all past studies of HMO production to infer the extent to which pairwise factor substitutions (e.g., administrative services vs. medical care resources, e.g., hospital days, physician services) suggest potential for cost savings in groups and independent practice associations. Given the industry's nonhomothetic production over a 20-year period, the conceptually valid Morishima elasticity measure at constant output reveals limited cost-saving potentials from factor interchange and input demands. These opportunities differ for groups and IPAs across Medicare and non-Medicare products. My findings add a timely and significant dimension to understanding potential cost savings in HMO operations. Policy suggestions and cost implications are rationalized in light of the declining Medicare HMO enrollment and recent changes in factor input prices.
In this series we have described changes in the quality of care that have occurred in the treatment of hospitalized elderly Medicare patients with one of five conditions between 1981-1982 and 1985-1986. In this article we report on a mortality analysis, patient and hospital subgroup comparisons, and time series studies we have conducted in an attempt to determine whether changes in quality of care can be linked causally to the introduction of the prospective payment system. Based on these analyses we conclude that (1) mortality following hospitalization has been unaffected by the introduction of the prospective payment system, and improvements in in-hospital processes of care that began prior to the prospective payment system have continued after its introduction, but (2) the prospective payment system has increased the likelihood that a patient will be discharged home in an unstable condition. We recommend that efforts to correct this problem be intensified and that clinical monitoring of the impact of the prospective payment system continue as hospital cost-containment pressures intensify.
We compared patient outcomes before and after the introduction of the diagnosis related groups (DRG)-based prospective payment system (PPS) in a nationally representative sample of 14,012 Medicare patients hospitalized in 1981 through 1982 and 1985 through 1986 with one of five diseases. For the five diseases combined; length of stay dropped 24% and in-hospital mortality declined from 16.1% to 12.6% after the PPS was introduced (P less than .05). Thirty-day mortality adjusted for sickness at admission was 1.1% lower than before (16.5% pre-PPS, 15.4% post-PPS; P less than .05), and 180-day adjusted mortality was essentially unchanged at 29.6% pre-vs 29.0% post-PPS (P less than .05). For patients admitted to the hospital from home, 4% more patients were not discharged home post-PPS than pre-PPS (P less than .05), and an additional 1% of patients had prolonged nursing home stays (P less than .05). The introduction of the PPS was not associated with a worsening of outcome for hospitalized Medicare patients. However, because our post-PPS data are from 1985 and 1986, we recommend that clinical monitoring be maintained to ensure that changes in prospective payment do not negatively affect patient outcome.
We developed disease-specific measures of sickness at admission based on medical record data to study mortality of Medicare patients with one of five conditions (congestive heart failure, acute myocardial infarction, cerebrovascular accident, pneumonia, and hip fracture). We collected an average of 73 sickness variables per disease, but our final sickness-at-admission scales use, on average, 19 variables. These scales are publicly available, and explain 25% of the variance in 30-day postadmission mortality for patients with acute myocardial infarction, pneumonia, or cerebrovascular accident. Sickness at admission increased following the introduction of the prospective payment system (PPS). For our five diseases combined, the 30-day mortality to be expected because of sickness at admission was 1.0% higher in the 1985-1986 period than in the 1981-1982 period (16.4% vs 15.4%), and the expected 180-day mortality was 1.6% higher (30.1% vs 28.5%). Studies of the effects of PPS on mortality must take this increase in sickness at admission into account.
In response to a change in reimbursement incentives, hospitals may change the intensity of services provided to a given set of patients, change the type (or severity) of patients they see, or change their market share. Each of these three responses, which we define as a moral hazard effect, a selection effect, and a practice-style effect, can influence average resource use in a population. We develop and implement a methodology for disentangling these effects using a panel data set of Medicaid psychiatric discharges in New Hampshire. We also find evidence for the form of quality competition hypothesized by Dranove (1987).
We examine how hospital treatment intensity is affected by an exogenous change in average reimbursement for an admission. Theory predicts that treatment intensity would be most affected for highly profitable services but unaffected for unprofitable services. We use Medicare inpatient data from 11 states for 16 disease categories that vary in the generosity of reimbursement to test this prediction. Using the coefficients from quantile regressions, we calculate a difference‐in‐difference estimate of the effect of the Balanced Budget Act (BBA) of 1998, comparing the pre‐ and post‐BBA change in treatment intensity at high Medicare share hospitals to low Medicare share hospitals. We find that not‐for‐profit hospitals cut treatment intensity at the 50th, 75th, and 95th quantiles only for generously reimbursed services. Intensity at the 25th percentile was unaffected, regardless of generosity. We did not measure a statistically significant response at for‐profit or public hospitals to the BBA.
Recent research has warned that the introduction of Diagnosis Related Groups (DRGs) based on hospital treatment decisions will lead to an increase in the rate of marginal procedures and to a resumption of high medical expenditure growth rates. This paper explores the often contradictory effects of the multiple reimbursement incentives created by refinements to the Prospective Payment System (PPS) (principally, the introduction of procedure-based DRGs) on hospital resource allocation. Three effects are examined in the paper: (i) the change in primary or payment-related procedures owing to marginal reimbursement incentives; (ii) the change in secondary or non-payment-related services owing to average price incentives; and (iii) the change in average severity of both medical and surgical admissions. The model suggests that the anticipated positive effect of marginal reimbursement incentives on overall hospital resource use may be offset by several factors, most notably the lower average payment incentives of non-procedural DRGs. Copyright (C) 2000 John Wiley & Sons, Ltd.
The objective of this study was to develop a prospectively applicable method for classifying comorbid conditions which might alter the risk of mortality for use in longitudinal studies. A weighted index that takes into account the number and the seriousness of comorbid disease was developed in a cohort of 559 medical patients. The 1-yr mortality rates for the different scores were: "0", 12% (181); "1-2", 26% (225); "3-4", 52% (71); and "greater than or equal to 5", 85% (82). The index was tested for its ability to predict risk of death from comorbid disease in the second cohort of 685 patients during a 10-yr follow-up. The percent of patients who died of comorbid disease for the different scores were: "0", 8% (588); "1", 25% (54); "2", 48% (25); "greater than or equal to 3", 59% (18). With each increased level of the comorbidity index, there were stepwise increases in the cumulative mortality attributable to comorbid disease (log rank chi 2 = 165; p less than 0.0001). In this longer follow-up, age was also a predictor of mortality (p less than 0.001). The new index performed similarly to a previous system devised by Kaplan and Feinstein. The method of classifying comorbidity provides a simple, readily applicable and valid method of estimating risk of death from comorbid disease for use in longitudinal studies. Further work in larger populations is still required to refine the approach because the number of patients with any given condition in this study was relatively small.
Payment incentives to both consumers and providers have significant consequences for the equity and efficiency of a healthcare system, and have recently come to the fore in health policy reforms. This review first discusses the economic rationale for the apparent international convergence toward payment systems with mixed demand- and supply-side cost sharing. The recent payment reforms undertaken in Taiwan, South Korea and China are then summarised. Available evidence clearly indicates that payment incentives matter, and, in particular, that supply-side cost sharing can improve efficiency without undermining equity. Further study and monitoring of health service quality and risk selection is warranted.
In this series we have described changes in the quality of care that have occurred in the treatment of hospitalized elderly Medicare patients with one of five conditions between 1981-1982 and 1985-1986. In this article we report on a mortality analysis, patient and hospital subgroup comparisons, and time series studies we have conducted in an attempt to determine whether changes in quality of care can be linked causally to the introduction of the prospective payment system. Based on these analyses we conclude that (1) mortality following hospitalization has been unaffected by the introduction of the prospective payment system, and improvements in in-hospital processes of care that began prior to the prospective payment system have continued after its introduction, but (2) the prospective payment system has increased the likelihood that a patient will be discharged home in an unstable condition. We recommend that efforts to correct this problem be intensified and that clinical monitoring of the impact of the prospective payment system continue as hospital cost-containment pressures intensify.
(JAMA. 1990;264:1989-1994)
We developed disease-specific measures of sickness at admission based on medical record data to study mortality of Medicare patients with one of five conditions (congestive heart failure, acute myocardial infarction, cerebrovascular accident, pneumonia, and hip fracture). We collected an average of 73 sickness variables per disease, but our final sickness-at-admission scales use, on average, 19 variables. These scales are publicly available, and explain 25% of the variance in 30-day postadmission mortality for patients with acute myocardial infarction, pneumonia, or cerebrovascular accident. Sickness at admission increased following the introduction of the prospective payment system (PPS). For our five diseases combined, the 30-day mortality to be expected because of sickness at admission was 1.0% higher in the 1985-1986 period than in the 1981-1982 period (16.4% vs 15.4%), and the expected 180-day mortality was 1.6% higher (30.1% vs 28.5%). Studies of the effects of PPS on mortality must take this increase in sickness at admission into account.
(JAMA. 1990;264:1962-1968)
Many policy makers believe that when Medicare constrains its payment rates for hospital inpatient care, private insurers end up paying higher rates as a result. I tested this "cost-shifting" theory using a unique new data set that combines MarketScan private claims data with Medicare hospital cost reports. Contrary to the theory, I found that hospital markets with relatively slow growth in Medicare inpatient hospital payment rates also had relatively slow growth in private hospital payment rates during 1995-2009. Using regression analyses, I found that a 10 percent reduction in Medicare payment rates led to an estimated reduction in private payment rates of 3 percent or 8 percent, depending on the statistical model used. These payment rate spillovers may reflect an effort by hospitals to rein in their operating costs in the face of lower Medicare payment rates. Alternatively, hospitals facing cuts in Medicare payment rates may also cut the payment rates they seek from private payers to attract more privately insured patients. My findings indicate that repealing cuts in Medicare payment rates would not slow the growth in spending on hospital care by private insurers and would in fact be likely to accelerate the growth in private insurers' costs and premiums.
In spite of numerous discussions and programs aimed at reducing public health care costs in Germany, the country has seen a massive increase in health care costs at an annual average rate of 7% since 1972. When German policymakers decided to reform the health care system by passing legislative measures on 22 December 1999, one of the key elements was to oblige hospitals and health insurance providers to replace the existing retrospective and procedural reimbursement system with a new prospective and diagnostic system based on diagnosis-related groups (DRGs). German policymakers are hoping to accomplish two feats with the introduction of DRGs: firstly, to improve the profitability of the health care system, and secondly, to improve the quality of health care services because DRGs require documentation and coding, which leads to increased transparency and allows for an external comparison of rendered services (benchmarking), as well as for an analysis and assessment of how appropriate and how successful the rendered services were in each particular case. Although the intentions underlying the introduction of DRGs are unquestionable, it remains to be determined whether the introduction has negative effects as well, and to which extent these negative effects have shown up so far. Hence the purpose of our survey will be to provide an extensive and systematic overview of results from other countries, along with preliminary results from Germany. In order to judge the trade-off between the desired and negative effects in a DRG system, we will define the set of parameters that determine the incentives of health care agents in such a system before surveying the economic and medical literature in light of these parameters in Section 3 and summarizing the results in Section 4. In view of the literature analysed, we find that the introduction of DRGs hasstarted a tendency towards a reduction in costs and towards a focus on profitability. If the legislator takes the necessary actions to reduce possible negative effects like manipulation and upcoding, the introduction of G-DRGs will lead to an increase in economic effectiveness and efficiency, while bringing more transparency into the quality of medical services at the same time.
To examine the impacts of diagnosis-related group (DRG) payments on health care provider's behavior under a universal coverage system in Taiwan.
This study employed a population-based natural experiment study design. Patients who underwent coronary artery bypass graft surgery or percutaneous transluminal coronary angioplasty, which were incorporated in the Taiwan version of DRG payments in 2010, were defined as the intervention group. The comparison group consisted of patients who underwent cardiovascular procedures which were paid for by fee-for-services schemes and were selected by propensity score matching from patients treated by the same group of surgeons. The generalized estimating equations model and difference-in-difference analysis was used in this study.
The introduction of DRG payment resulted in a 10% decrease (p<0.001) in patient's length of stay in the intervention group in relation to the comparison group. The intensity of care slightly declined with p<0.001. No significant changes were found concerning health care outcomes measured by emergency department visits, readmissions, and mortality after discharge.
The DRG-based payment resulted in reduced intensity of care and shortened length of stay. The findings might be valuable to other countries that are developing or reforming their payment system under a universal coverage system.
This chapter reviews the literature on payment schemes for government purchases of health services. It focuses on four themes: (1) the tension between obtaining appropriate quality of services and keeping the cost of those services at an acceptable level; (2) the role of cost sharing by the payer when there is asymmetric information between purchaser and supplier about costs or case-mix; (3) the importance of commitment in purchasing; and (4) the role of reputation in maintaining quality in long term relationships between purchasers and suppliers.
Payer-driven competition has been widely advocated as a means of increasing efficiency in health care markets. The 1990s reforms to the UK health service followed this path. We examine whether competition led to better outcomes for patients, as measured by death rates after treatment following heart attacks. Using data that until 1999 were not publicly available in any form on hospital level death rates, we find that the relationship between competition and quality of care appears to be negative. Greater competition is associated with higher death rates, controlling for patient mix and other observed characteristics of the hospital and the catchment area for its patients. However, the estimated impact of competition is small.
We analyse the properties of optimal price adjustment to hospitals when no lump-sum transfers are allowed and when prices differ to reflect observable exogenous differences in costs. We find that: (a) when the marginal benefit from treatment is decreasing and the cost function is the power function, price adjustment for hospitals with higher costs is positive but partial; if the marginal benefit is constant, the price is identical across providers; (b) if the cost function is exponential or it is separable in monetary and non-monetary costs (and linear in monetary costs), price adjustment is positive even when the marginal benefit is constant; (c) higher inequality aversion of the purchaser increases concentration in prices and lowers concentration in quantities; (d) if some dimensions of costs are private information, a higher correlation between the observable and unobservable cost component increases the optimal price for providers whose observable costs are above the average.
While there is broad agreement that the way that health care providers are paid affects their performance, the empirical literature on the impacts of provider payment reforms is surprisingly thin. During the 1990s and early 2000s, many European and Central Asian (ECA) countries shifted from paying hospitals through historical budgets to fee-for-service (FFS) or patient-based payment (PBP) methods (mostly variants of diagnosis-related groups, or DRGs). Using panel data on 28 countries over the period 1990-2004, we exploit the phased shift from historical budgets to explore aggregate impacts on hospital throughput, national health spending, and mortality from causes amenable to medical care. We use a regression version of difference-in-differences (DID) and two variants that relax the DID parallel trends assumption. We find that FFS and PBP both increased national health spending, including private (i.e. out-of-pocket) spending. However, they had different effects on inpatient admissions (FFS increased them; PBP had no effect), and average length of stay (FFS had no effect; PBP reduced it). Of the two methods, only PBP appears to have had any beneficial effect on "amenable mortality", but we found significant impacts for only a couple of causes of death, and not in all model specifications.
This study aims to present an overview of the evolutionary policy process in reforming the health care system in Taiwan, through dissecting the forces of knowledge, social-cultural context, economic resources and political system. We further identify factors, which had a significant impact on health care reform policies in Taiwan through illustrative policy examples. One of the most illuminating examples highlighted is the design and implementation of a single-payer National Health Insurance (NHI) program in 1995, after nearly five years of planning efforts (1988-1993) and a two-year legislative marathon. The NHI is one of the most popular social programs ever undertaken in the history of Taiwan, which greatly enhances financial protection against unexpected medical expenses and assures access to health services. Nonetheless, health care reform still has an unfinished agenda. Despite high satisfaction ratings, Taiwan's health care system today is encountering mounting pressure for new reforms as a result of its rapidly aging population, economic stagnation, and imbalanced NHI checkbook. Although there may exist some heterogeneous system characteristics and challenges among different health care systems around the world, Taiwan's experiences in reforming its health care system for the past few decades may provide valuable lessons for countries going through rapid economic and political transition.
This article reviews the basic theoretical model of risk adjustment (Glazer/McGuire 2000) with a special focus on a coherent presentation of the main results. With adverse selection a regulator pursuing efficiency and solidarity objectives will need a risk adjustment scheme acting on a signal to accomplish both aims. With an imperfect signal this result will not hold. The regulator can react by trying to find more informative signals or by changing the calculation of the risk adjustment scheme (optimal risk adjustment). The model is then extended to derive results on the associated incentives regarding economic efficiency, manipulation of signals and innovation. The incentives will hold with perfect signals but may be violated in the imperfect signal setting. Optimal risk adjustment will most likely have a negative effect on these incentives. The results are contrasted with the empirical literature on the risk adjustment procedure in Germany which is centred on risk selection, the choice of risk adjustors and incentive effects. The paper concludes with an outlook on the ongoing reform of the German risk adjustment procedure.
We examine how hospital treatment intensity is affected by an exogenous change in average reimbursement for an admission. Theory predicts that treatment intensity would be most affected for highly profitable services but unaffected for unprofitable services. We use Medicare inpatient data from 11 states for 16 disease categories that vary in the generosity of reimbursement to test this prediction. Using the coefficients from quantile regressions, we calculate a difference-in-difference estimate of the effect of the Balanced Budget Act (BBA) of 1998, comparing the pre- and post-BBA change in treatment intensity at high Medicare share hospitals to low Medicare share hospitals. We find that not-for-profit hospitals cut treatment intensity at the 50th, 75th, and 95th quantiles only for generously reimbursed services. Intensity at the 25th percentile was unaffected, regardless of generosity. We did not measure a statistically significant response at for-profit or public hospitals to the BBA.
Hospital expenditures continue to increase at rates that are higher than that of GNP growth. Policymakers are experimenting with a number of reimbursement methods in an attempt to curtail the growth in hospital costs. This article empirically assesses the impact of various hospital reimbursement methods on the use of hospital services. We specified and estimated a model of hospital duration for Medicaid psychiatric patients. A new semiparametric approach to estimation was implemented for a large national sample of hospital discharges. The empirical findings show significant reductions in hospital duration are associated with per case prospective payment as compared with cost-based reimbursement.
Under the system of hospital reimbursement for Medicare patients, hospitals receive a prospectively determined price that varies according to the diagnosis related group (DRG) to which the patient is assigned. Rate-setting by DRG encourages hospitals to specialize in those DRGs for which they have relatively low production costs. This may substantially reduce aggregate hospitalization costs if specializing hospitals are efficient. If, instead, hospitals specialize by treating relatively healthier patients within each DRG, cost savings may be mitigated. The wide variation of patient-specific costs within DRGs promotes the latter kind of specialization and reduces the effectiveness of rate-setting.
In the typical regulatory scheme a franchised monopoly has little incentive to reduce costs. This article proposes a mechanism in which the price the regulated firm receives depends on the costs of identical firms. In equilibrium each firm chooses a socially efficient level of cost reduction. The mechanism generalizes to cover heterogeneous firms with observable differences. Medicare's prospective reimbursement of hospitals by using diagnostically related groups is a scheme very similar to the one outlined here.
This study's purpose was to monitor changes in hospital utilization and discharge patterns for a large national sample of Medicare psychiatric patients treated in short-term general hospitals from 1980 through 1987. We compare data on the Medicare sample with trends for psychiatric patients with Blue Cross or private health insurance who were treated in the same hospitals. Study results indicate that treatment patterns changed for the Medicare psychiatric patients. Average length of stay decreased, especially for patients treated in scatterbeds. The proportion of patients discharged to other hospitals increased, and the number of admissions dropped for those patients over age 75.
We used Medicare discharge data for the years 1984 and 1985 to analyze reductions in lengths of stay for psychiatric patients treated in general hospitals that did not have specialized psychiatric units. In response to Medicare's Prospective Payment System (PPS), not-for-profit hospitals experienced declines in lengths of stay averaging between 10% and 20% two years after they went onto PPS, while for-profit hospitals experienced a somewhat greater decline. Lengths of stay fell most rapidly during the months immediately surrounding the date on which a hospital began to be paid under PPS. This response included an anticipatory effect--hospital lengths of stay began shortening just before PPS payments started.
Concern is often expressed that hospitals may be making cost/quality trade-offs under Medicare's prospective payment system. To evaluate the early effects of PPS on inpatient utilization and quality of care, we studied a cohort of 729 U.S. short-term general hospitals from nonwaivered states. We used a linear forecasting model to project 1984 figures based on trends from 1980 to 1983. We found no evidence that the quality of care deteriorated in 1984 for Medicare patients. Consultation rates remained constant, and in-hospital deaths and readmission rates were consistent with previous trends for the Medicare population. Overall, it appears that PPS has reduced hospital utilization without producing deterioration in the quality of care.
The objective of this study was to develop a prospectively applicable method for classifying comorbid conditions which might alter the risk of mortality for use in longitudinal studies. A weighted index that takes into account the number and the seriousness of comorbid disease was developed in a cohort of 559 medical patients. The 1-yr mortality rates for the different scores were: "0", 12% (181); "1-2", 26% (225); "3-4", 52% (71); and "greater than or equal to 5", 85% (82). The index was tested for its ability to predict risk of death from comorbid disease in the second cohort of 685 patients during a 10-yr follow-up. The percent of patients who died of comorbid disease for the different scores were: "0", 8% (588); "1", 25% (54); "2", 48% (25); "greater than or equal to 3", 59% (18). With each increased level of the comorbidity index, there were stepwise increases in the cumulative mortality attributable to comorbid disease (log rank chi 2 = 165; p less than 0.0001). In this longer follow-up, age was also a predictor of mortality (p less than 0.001). The new index performed similarly to a previous system devised by Kaplan and Feinstein. The method of classifying comorbidity provides a simple, readily applicable and valid method of estimating risk of death from comorbid disease for use in longitudinal studies. Further work in larger populations is still required to refine the approach because the number of patients with any given condition in this study was relatively small.
This research addresses the following types of responses by hospitals to increased financial risk: (a) increases in prices to privately insured patients (testing separately the effects of risk from the effects of "cost-shifting" that depends on level of Medicare payment in relation to case mix-adjusted cost); (b) changes in service mix offered and selectivity in acceptance of patients to reduce risk; and (c) efforts to reduce variation in resource use for those patients admitted.
The database includes a national panel of over 400 hospitals providing information from patient discharge abstracts, hospital financial reports, and county level information over the period 1980-1987.
Econometric methods suitable to panel data are implemented, with tests for pooling, hospital-specific fixed effects, and possible problems of selection bias.
The prices paid by private insurers to a particular hospital were affected by the changes in risk imposed by Medicare prospective payment, the generosity of Medicare payment, state rate regulation, and ability of the hospital to bear risk. The risk-weighted measure of case mix did not respond to changes in payment policy, but other variables reflecting the management of care after admission to reduce risk did change in the predicted directions.
Some of the findings in this article are relevant to current Medicare policies that involve risk-sharing, for instance, special allowances for "outlier" patients with unusually high cost, and for sole community hospitals. The first type of allowance appears successful in preserving access to care, while the second type is not well justified by the findings. State rate regulation programs were associated not only with lower hospital prices but also with less risk reduction behavior by hospitals. The design of regulation as a sort of risk-pooling arrangement across payers and hospitals may be attractive to hospitals and help explain their support for regulation is some states.
Payment rates in Medicare's Prospective Payment System (PPS) are based on averages of historical hospital costs. Compared to reimbursing each hospital's own costs, pricing at the average of costs implies a massive redistribution of payments among hospitals. Because not all sources of hospital costs are accounted for in the PPS, some of this redistribution is 'unfair'. Information in hospital-specific costs on unmeasured patient severity and input prices can be exploited to reduce payment inequities. However, fully hospital-specific rates are not optimal because costs also reflect treatment intensity and efficiency differences among hospitals.
Nearly ten years after the implementation of Medicare's Prospective Payment System (PPS), some of its major impacts remain hard to explain using existing economic models. We develop a simple model of the hospital's choice of intensity of care, which affects demand for admissions. The model suggests an important role for the level of prospective payment, independent of the effect of marginal incentives. Predictions from the model are compared first with aggregate utilization data from Medicare's PPS experience, and then with various hospital-level studies which control for interhospital differences in reimbursement rates.
It is well accepted that the Medicare Payment System caused average length of stay in United States hospitals to fall, but these calculations have been based on patients in short-stay, acute care hospitals. If one considers all patients covered by Medicare, length of stay rose between 1981 and 1984, although the 1985 value was below the 1981 value. The proximate cause was a marked increase in the proportion of patients staying more than 60 days in the hospital. The data are consistent with a shift of such patients from short-stay, acute care hospitals to other, exempt hospitals and units.
Tests were conducted to determine whether implementation of the prospective payment system caused access problems for patients with an above-average likelihood of being unprofitable. Since implementation, patients in diagnosis-related groups that are, on average, unprofitable are not more likely to be transferred. However, they are more likely to be found in hospitals of last resort (the only evidence from these tests indicating access problems). Outlier patients are not more likely to be found in last-resort hospitals. The access issue will continue to bear scrutiny, but there is not as yet evidence that it is a serious problem.
The demand inducement hypothesis predicts that physicians will respond to reductions in their income by increasing the volume of their services when the income effect is strong and negative. I test for such inducement in the market for coronary artery bypass grafting (CABG), using a longitudinal panel of physicians in New York and Washington states. The results show that physicians whose incomes were reduced the most by Medicare fee cuts performed higher volumes of CABGs, and they did so in both the Medicare and private markets.
This paper develops implications of Arrow's hypothesis that nonprofit organizations are prevalent in health care because of quality uncertainty. The model analyzes the ability of nonprofits to mitigate market failures created by asymmetric information in an environment characterized by potential competition from both explicitly for-profit firms and for-profits in disguise (profit-motivated firms who obtain nonprofit status in order to exploit the perceived trustworthiness of the nonprofit sector). Under certain conditions, it is shown that nonprofit status can serve as a credible signal of quality and that nonprofits can decrease the underprovision of quality both by providing high quality services and indirectly via a spillover effect on quality in the for-profit sector. Applicability to long-term care and implications for empirical research and policy towards nonprofits in health care are discussed.
Both Medicare and Medicaid are reducing payments to hospitals, and there is widespread concern that hospitals may respond by increasing prices to privately insured patients. Theoretical models of hospital behaviour have ambiguous predictions as to whether, and under what circumstances, hospitals will shift costs to private payers. This paper extends previous theoretical models and then tests empirically using data from California for the 1983-1991 period, a time of increasingly intense price competition. Hospitals did increase their prices to private payers in response to reductions in Medicare rates; they had far smaller and generally insignificant responses to changes in Medicaid reimbursement. Hospital ownership and the competitiveness of the hospital market both affected this behaviour, but there was no significant change over time. The results suggest the need to broaden our models of hospital behaviour to 'embed' them in their local markets.
Recent research has warned that the introduction of Diagnosis Related Groups (DRGs) based on hospital treatment decisions will lead to an increase in the rate of marginal procedures and to a resumption of high medical expenditure growth rates. This paper explores the often contradictory effects of the multiple reimbursement incentives created by refinements to the Prospective Payment System (PPS) (principally, the introduction of procedure-based DRGs) on hospital resource allocation. Three effects are examined in the paper: (i) the change in primary or payment-related procedures owing to marginal reimbursement incentives; (ii) the change in secondary or non-payment-related services owing to average price incentives; and (iii) the change in average severity of both medical and surgical admissions. The model suggests that the anticipated positive effect of marginal reimbursement incentives on overall hospital resource use may be offset by several factors, most notably the lower average payment incentives of non-procedural DRGs.
The purpose of this study was to examine the relationship between adoption of case payment for laparoscopic cholecystectomy (LC) and the growth rate of LC, outcomes of patients undergoing LC, and total healthcare expenditures on cholecystectomy. We used the claims data from Bureau of National Health Insurance (BNHI) to identify patients who underwent LC and open cholecystectomy (OC). Data were available from January 1996 to October 1997 and from January 1998 to October 1999, enabling use to compare data from before and after the introduction of the new case payment system. Results showed that the volume and the proportion of LCs increased after adoption of the new payment method. We did not find a sharp increase in the cholecystectomy rate during the study period. In terms of outcomes, the admission rate for emergencies decreased; the surgery mortality rate decreased, but the readmission rate increased. The average cost and length of hospital stay for LC subjects decreased; however, the total cost of cholecystectomy increased. The impact on LC of the introduction of a case payment method failed to reduce total health expenditures for cholecystectomy.
Case payment, a prospective payment system akin to diagnosis-related groups (DRGs) has in-built incentives for hospitals to transfer inpatients to their own ambulatory care units following early discharge. This study used nation-wide inpatient claims data on a total of 100,730 patients treated in 2000 in (Taiwan): cesarean section (59,364 cases), femoral/inguinal hernia operation (18,675 cases), and hemorrhoidectomy (22,691 cases), all reimbursed by case payment, to explore the relationship between hospital ownership and patient transfers to outpatient treatment. For all three diagnoses, for-profit (FP) hospitals not only had lower lengths of stay (LOS) compared to public hospitals, but also showed very high odds of patient transfer to their own outpatient units, after controlling for institutional variables, (hospital level, teaching status, and geographic location), hospital competitive environment (the Herfindal-Hirschman index), and patient variables (gender, age, length of stay, and number of secondary diagnoses, a proxy for severity of illness). Similar, though slightly lower odds were observed with not-for-profit (NFP) hospitals relative to public hospitals. The findings support the property rights theory, suggesting that in Taiwan, institutional profit maximization motives may be driving patient transfers under the case payment diagnoses, rather than medical care needs. In NFP hospitals, their physician compensation mechanism, driven largely by care volumes provided by each physician, appears to be driving the disproportionately greater likelihood of patient transfer to outpatient care.
Payment incentives to both consumers and providers have significant consequences for the equity and efficiency of a healthcare system, and have recently come to the fore in health policy reforms. This review first discusses the economic rationale for the apparent international convergence toward payment systems with mixed demand- and supply-side cost sharing. The recent payment reforms undertaken in Taiwan, South Korea and China are then summarised. Available evidence clearly indicates that payment incentives matter, and, in particular, that supply-side cost sharing can improve efficiency without undermining equity. Further study and monitoring of health service quality and risk selection is warranted.
Do Primary Care Physicians (PCPs) react strategically to financial incentives and if so how? To address this question, we follow a quasi-natural experiment in Quebec, using a panel system technique. In so doing, we both correct for underestimation biases in earlier time series findings and generate new results on the issue of complementarity/substitution between consultations with varying levels of technicality. Under both techniques, we show that PCPs are sensitive to the enforcement and subsequent temporary removals of expenditure caps and more generally, to changes in consultations' relative prices over time. These results support the existence of a discretionary power over the choice of consultation, PCPs increasing strategically the number of the more technical (and therefore more lucrative) consultations when pressed to defend their income. This finding for primary care parallels the now well-established DRG creep in hospitals. The panel system approach offers a better account of the complexity surrounding PCPs' decision-making process. In particular, it successfully addresses issues of physician heterogeneity, jointness between consultations and temporal breaks and generates robust estimates of PCPs volume and quality reactions to regulatory changes.
This paper studies factor substitution in one important sector: the nursing home industry. Specifically, we measure the extent to which nursing homes substitute materials for labor when labor becomes relatively more expensive. From a policy perspective, factor substitution in this market is important because materials-intensive methods of care are associated with greater risks of morbidity and mortality among nursing home residents. Studying longitudinal data from 1991 to 2000 on nearly every nursing home in the United States, we use the method of instrumental variables (IV) to address measurement error in nursing home wages. The results from the IV models yield evidence of factor substitution: higher nursing home wages are associated with greater use of psychoactive drugs and lower quality.
We use the implementation of a new prospective payment system (PPS) for inpatient rehabilitation facilities (IRFs) to investigate the effect of changes in marginal and average reimbursement on costs. The results show that the IRF PPS led to a significant decline in costs and length of stay. Changes in marginal reimbursement associated with the move from a cost-based system to a PPS led to a 7-11% reduction in costs. The elasticity of costs with respect to average reimbursement ranged from 0.26 to 0.34. Finally, the IRF PPS had little or no impact on mortality or the rate of return to community residence.