Working Paper: CEPR ID: DP10155
Authors: Mathias Kifmann; Luigi Siciliani
Abstract: This study investigates hospitals? dynamic incentives to select patients when hospitals are remunerated according to a prospective payment system of the DRG type. Given that prices typically reflect past average costs, we use a discrete-time dynamic framework. Patients differ in severity within a DRG. Providers are to some extent altruistic. For low altruism, a downward spiral of prices is possible which induces hospitals to focus on low-severity cases. For high altruism, dynamic price adjustment depends on relation between patients? severity and benefit. In a steady state, DRG prices are unlikely to give optimal incentives to treat patients.
Keywords: DRGs; hospitals; selection; severity
JEL Codes: I11; I18; L13; L44
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| low altruism among providers (D64) | downward spiral in DRG pricing (D49) |
| downward spiral in DRG pricing (D49) | hospitals focusing on treating low-severity patients (I11) |
| altruism (D64) | treatment decisions (D87) |
| treatment decisions (D87) | pricing dynamics (D49) |
| higher altruism (D64) | hospitals treating more patients (I11) |
| hospitals treating more patients (I11) | upward adjustment in DRG price over time (E31) |
| high altruism (D64) | overtreatment (I12) |
| overtreatment (I12) | increased average costs (L11) |
| increased average costs (L11) | higher DRG prices (E39) |
| altruism (D64) | pricing (D49) |
| pricing (D49) | future treatment selections (C22) |