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Upcoding and Optimal Auditing in Health Care (or The economics of DRG creep)

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  • Kuhn, Michael
  • Siciliani, Luigi

Abstract

We present a model of optimal contracting between a purchaser and a provider of health services. We assume that providers can increase demand by increasing quality but can also inflate activity through a manipulative effort (upcoding or DRG creep). We derive and compare the optimal price and audit policy for the purchaser under two scenarios: a) the purchaser can commit to a given audit policy (commitment); b) the purchaser cannot commit to a given audit policy (no commitment). If reported output is additive in quality and manipulation, we find that, if price is exogenously determined, the frequency of an audit is higher under the 'commitment' scenario than under the 'no commitment' one; also, under 'commitment', the degree of manipulation, quality and reported output are higher. If price is endogenous (i.e. it can be optimally chosen by the purchaser), then price is higher under 'no commitment' while the optimal audit policy, the equilibrium quality, manipulation and purchaser's net benefit are identical. If reported output is multiplicative in manipulation and quality, the purchaser sets a higher price under 'no commitment'. Nevertheless, quality and manipulation remain at lower levels, whereas auditing is more intensive than under commitment. The inability to commit now reduces the purchaser's net benefit.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6689.

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Date of creation: Feb 2008
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Handle: RePEc:cpr:ceprdp:6689

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Related research

Keywords: DRG creep; Falsification; Hospitals;

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References

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  1. Ma, Ching-to Albert, 1994. "Health Care Payment Systems: Cost and Quality Incentives," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 93-112, Spring.
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  15. Mougeot, Michel & Naegelen, Florence, 2005. "Hospital price regulation and expenditure cap policy," Journal of Health Economics, Elsevier, vol. 24(1), pages 55-72, January.
  16. Barros, Pedro Pita, 2003. "Cream-skimming, incentives for efficiency and payment system," Journal of Health Economics, Elsevier, vol. 22(3), pages 419-443, May.
  17. Ellis, Randall P., 1998. "Creaming, skimping and dumping: provider competition on the intensive and extensive margins1," Journal of Health Economics, Elsevier, vol. 17(5), pages 537-555, October.
  18. Chalkley, Martin & Malcomson, James M, 1998. "Contracting for Health Services with Unmonitored Quality," Economic Journal, Royal Economic Society, vol. 108(449), pages 1093-1110, July.
  19. Reinganum, Jennifer F. & Wilde, Louis L., 1985. "Income tax compliance in a principal-agent framework," Journal of Public Economics, Elsevier, vol. 26(1), pages 1-18, February.
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