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DRG prospective payment systems: refine or not refine?

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  • Elin Johanna Gudrun Hafsteinsdottir
  • Luigi Siciliani
Abstract
We present a model of contracting between a purchaser of health services and a provider (a hospital). We assume that hospitals provide two alternative treatments for a given diagnosis: a less intensive one (for example, a medical treatment) and a more intensive one (a surgical treatment). We assume that prices are set equal to the average cost reported by the providers, as observed in many OECD countries (yardstick competition). The purchaser has two options: (1) to set one tariff based on the diagnosis only and (2) to differentiate the tariff between the surgical and the medical treatment (i.e. to refine the tariff). We show that when tariffs are refined, the provider has always an incentive to overprovide the surgical treatment. If the tariff is not refined, the hospital underprovides the surgical treatment (and overprovides the medical treatment) if the degree of altruism is sufficiently low compared with the opportunity cost of public funds. Our main result is that price refinement might not be optimal. Copyright © 2009 John Wiley & Sons, Ltd.

Suggested Citation

  • Elin Johanna Gudrun Hafsteinsdottir & Luigi Siciliani, 2010. "DRG prospective payment systems: refine or not refine?," Health Economics, John Wiley & Sons, Ltd., vol. 19(10), pages 1226-1239, October.
  • Handle: RePEc:wly:hlthec:v:19:y:2010:i:10:p:1226-1239
    DOI: 10.1002/hec.1547
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    Cited by:

    1. Griebenow, Malte, 2023. "Should physicians team up to treat chronic diseases?," Journal of Health Economics, Elsevier, vol. 89(C).
    2. Gross, Christiane & Schübel, Thomas & Hoffmann, Rasmus, 2015. "Picking up the pieces—Applying the DISEASE FILTER to health data," Health Policy, Elsevier, vol. 119(4), pages 549-557.
    3. Bäuml, Matthias & Kümpel, Christian, 2020. "Hospital responses to the introduction of reimbursements by treatment intensity in a (presumably lump sum) DRG system," hche Research Papers 22, University of Hamburg, Hamburg Center for Health Economics (hche).
    4. Gaughan, James & Gutacker, Nils & Grašič, Katja & Kreif, Noemi & Siciliani, Luigi & Street, Andrew, 2019. "Paying for efficiency: Incentivising same-day discharges in the English NHS," Journal of Health Economics, Elsevier, vol. 68(C).
    5. François Maréchal & Lionel Thomas, 2019. "The optimal payment system for hospitals under adverse selection, moral hazard, and limited liability," Working Papers 2019-04, CRESE.
    6. Matthias Vogl, 2012. "Assessing DRG cost accounting with respect to resource allocation and tariff calculation: the case of Germany," Health Economics Review, Springer, vol. 2(1), pages 1-12, December.
    7. Mathias Kifmann & Luigi Siciliani, 2017. "Average‐Cost Pricing and Dynamic Selection Incentives in the Hospital Sector," Health Economics, John Wiley & Sons, Ltd., vol. 26(12), pages 1566-1582, December.
    8. Martin Chalkley, 2012. "Contracts, Information and Incentives in Health Care," Chapters, in: Andrew M. Jones (ed.), The Elgar Companion to Health Economics, Second Edition, chapter 22, Edward Elgar Publishing.
    9. De Luca, Giacomo & Lisi, Domenico & Martorana, Marco & Siciliani, Luigi, 2021. "Does higher Institutional Quality improve the Appropriateness of Healthcare Provision?," Journal of Public Economics, Elsevier, vol. 194(C).
    10. Levaggi, Rosella & Moretto, Michele & Pertile, Paolo, 2014. "Two-part payments for the reimbursement of investments in health technologies," Health Policy, Elsevier, vol. 115(2), pages 230-236.
    11. Chris Bojke & Katja Grašič & Andrew Street, 2018. "How should hospital reimbursement be refined to support concentration of complex care services?," Health Economics, John Wiley & Sons, Ltd., vol. 27(1), pages 26-38, January.
    12. Elias Carroni & Giuseppe Pignataro & Luigi Siciliani, 2023. "Persuasion in Physician Agency," Discussion Papers 23/01, Department of Economics, University of York.
    13. Jurgita Januleviciute & Jan Erik Askildsen & Oddvar Kaarboe & Luigi Siciliani & Matt Sutton, 2016. "How do Hospitals Respond to Price Changes? Evidence from Norway," Health Economics, John Wiley & Sons, Ltd., vol. 25(5), pages 620-636, May.
    14. Rachet-Jacquet, Laurie & Toulemon, Léa & Rochaix, Lise, 2021. "Hospital payment schemes and high-priced drugs: Evidence from the French Add-on List," Health Policy, Elsevier, vol. 125(7), pages 923-929.
    15. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2012. "DRGs: the link between investment in technologies and appropriateness," Working Papers 31/2012, University of Verona, Department of Economics.
    16. Barros Pedro Pita & Martinez-Giralt Xavier, 2015. "Technological Adoption in Health Care – The Role of Payment Systems," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 15(2), pages 709-745, April.
    17. Matthias Bäuml & Christian Kümpel, 2021. "Hospital responses to the refinement of reimbursements by treatment intensity in DRG systems," Health Economics, John Wiley & Sons, Ltd., vol. 30(3), pages 585-602, March.
    18. Macuda Małgorzata, 2018. "Diagnosis-Related Group Prospective Payment System in Poland – Costs Versus Tariffs: The Case of Inguinal Hernia," Financial Sciences. Nauki o Finansach, Sciendo, vol. 23(3), pages 102-110, September.
    19. Nadja Kairies-Schwarz & Claudia Souček, 2020. "Performance Pay in Hospitals: An Experiment on Bonus–Malus Incentives," IJERPH, MDPI, vol. 17(22), pages 1-29, November.
    20. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2023. "Dynamic, incentive-compatible contracting for health services," Working Papers 2023.16, Fondazione Eni Enrico Mattei.
    21. Xidong Guo, 2024. "An analysis of a rural hospital's investment decision under different payment systems," Health Economics, John Wiley & Sons, Ltd., vol. 33(4), pages 714-747, April.
    22. Aleksandr Proshin & Alexandre Cazenave-Lacroutz & Zeynep Or & Lise Rochaix, 2018. "Impact of Diagnosis Related Group Refinement on the Choice Between Scheduled Caesarean Section and Normal Delivery: Recent Evidence from France," Working Papers halshs-01812107, HAL.
    23. Carine Milcent & Saad Zbiri, 2022. "Supplementary private health insurance: The impact of physician financial incentives on medical practice," Health Economics, John Wiley & Sons, Ltd., vol. 31(1), pages 57-72, January.
    24. François Maréchal & Lionel Thomas, 2021. "The impact of medical complications on optimal hospital payment," Journal of Public Economic Theory, Association for Public Economic Theory, vol. 23(6), pages 1144-1173, December.
    25. Wu, Jing & He, Xiaoning & Feng, Xing Lin, 2022. "Can case-based payment contain healthcare costs? - A curious case from China," Social Science & Medicine, Elsevier, vol. 312(C).

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    More about this item

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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