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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.

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Bibliographic Info

Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 19 (2010)
Issue (Month): 10 ()
Pages: 1226-1239

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Handle: RePEc:wly:hlthec:v:19:y:2010:i:10:p:1226-1239

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Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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Cited by:
  1. Levaggi, Rosella & Moretto, Michele & Pertile, Paolo, 2014. "Two-part payments for the reimbursement of investments in health technologies," Health Policy, Elsevier, Elsevier, vol. 115(2), pages 230-236.
  2. Janueleviciute, Jurgita & Askildsen, Jan Erik & Kaarbøe, Oddvar & Siciliani, Luigi & Sutton, Matt, 2013. "How Do Hospitals Respond To Price Changes?Evidence From Norway," Working Papers in Economics, University of Bergen, Department of Economics 15/12, University of Bergen, Department of Economics.
  3. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2012. "DRGs: the link between investment in technologies and appropriateness," Working Papers, University of Verona, Department of Economics 31/2012, University of Verona, Department of Economics.

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