The adverse effects of incentives regulation in health care: a comparative analysis with the U.S. and Japanese hospital data

The paper analyzes the effect of incentives regulation, when the yardstick competition approach is supplemented with a performance tax on providers. In an application to prospective payments in health care in the U.S. and Japan, we show differential effects of value-based purchasing, when price-setting is related to benchmark values of quality measures or length-of-stay. The predictions of our theoretical model, as well as empirical results offer persuasive evidence that unintended effects appear for best-performing hospitals. Patient experience/clinical-process-of-care measures significantly decrease in the top percentiles of the U.S. hospitals owing to the reform. Similarly, length of stay significantly increases for most diagnosis-related groups at Japanese hospitals in percentiles with the lowest length of stay. A natural experiment aimed at best-practice rate-setting diminishes the undesired effects of the reform.