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Rate-Setting by Diagnosis Related Groups and Hospital Specialization

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  • David Dranove

Abstract

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.

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Bibliographic Info

Article provided by The RAND Corporation in its journal RAND Journal of Economics.

Volume (Year): 18 (1987)
Issue (Month): 3 (Autumn)
Pages: 417-427

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Handle: RePEc:rje:randje:v:18:y:1987:i:autumn:p:417-427

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Cited by:
  1. Schreyögg, Jonas, 2004. "The Taiwanese health care system under efficiency scrutiny," Discussion Papers 2004/17, Technische Universität Berlin, School of Economics and Management.
  2. David Meltzer & Jeanette Chung, 2001. "Effects of Competition under Prospective Payment on Hospital Costs among High and Low Cost Admissions: Evidence from California, 1983 - 1993," NBER Working Papers 8069, National Bureau of Economic Research, Inc.
  3. Chalkley, Martin & Khalil, Fahad, 2005. "Third party purchasing of health services: Patient choice and agency," Journal of Health Economics, Elsevier, vol. 24(6), pages 1132-1153, November.
  4. Conrad Kobel & Engelbert Theurl, 2013. "Hospital specialisation within a DRG-Framework: The Austrian Case," Working Papers 2013-06, Faculty of Economics and Statistics, University of Innsbruck.
  5. Leemore S. Dafny, 2003. "How Do Hospitals Respond to Price Changes?," NBER Working Papers 9972, National Bureau of Economic Research, Inc.
  6. Nicholson, Sean & Song, David, 2001. "The incentive effects of the Medicare indirect medical education policy," Journal of Health Economics, Elsevier, vol. 20(6), pages 909-933, November.
  7. Paula González, 2005. "On a policy of transferring public patients to private practice," Health Economics, John Wiley & Sons, Ltd., vol. 14(5), pages 513-527.
  8. Faure-Grimaud, A. & Reiche, S., 2006. "Dynamic yardstick mechanisms," Games and Economic Behavior, Elsevier, vol. 54(2), pages 316-335, February.
  9. Leemore S. Dafny, 2005. "How Do Hospitals Respond to Price Changes?," American Economic Review, American Economic Association, vol. 95(5), pages 1525-1547, December.
  10. Boyd H. Gilman, 2000. "Hospital response to DRG refinements: the impact of multiple reimbursement incentives on inpatient length of stay," Health Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 277-294.
  11. Marini, Giorgia & Street, Andrew, 2007. "A transaction costs analysis of changing contractual relations in the English NHS," Health Policy, Elsevier, vol. 83(1), pages 17-26, September.
  12. Makoto Kakinaka & Ryuta Ray Kato, 2011. "Regulated Medical Fee Schedule of the Japanese Health Care System," Working Papers EMS_2011_13, Research Institute, International University of Japan.
  13. Antoine Faure-Grimaud & Sonje Reiche, 2003. "Dynamic yardstick regulation," LSE Research Online Documents on Economics 19319, London School of Economics and Political Science, LSE Library.
  14. Olga Milliken & Rose Anne Devlin & Vicky Barham & William Hogg & Simone Dahrouge & Grant Russell, 2008. "Comparative Efficiency Assessment of Primary Care Models Using Data Envelopment Analysis," Working Papers 0802E, University of Ottawa, Department of Economics.
  15. Randall P. Ellis & Thomas G. McGuire, 1993. "Supply-Side and Demand-Side Cost Sharing in Health Care," Journal of Economic Perspectives, American Economic Association, vol. 7(4), pages 135-151, Fall.
  16. Siciliani, Luigi, 2006. "Selection of treatment under prospective payment systems in the hospital sector," Journal of Health Economics, Elsevier, vol. 25(3), pages 479-499, May.

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