Does DRG funding encourage hospital specialization? Evidence from the Italian National Health Service

The impact of diagnosis‐related group (DRG)‐based funding has been analyzed along a wide range of dimensions. Its effects on hospital specialization, however, have been investigated only sparsely. This paper examines such effects in the context of the Italian National Health Service, where decentralization has produced a significant degree of variation in funding arrangements. To this end, a 9‐year panel data set covering 762 Italian public and private hospitals was analyzed using a finite mixture model approach. Hospital specialization was measured by the internal Herfindahl‐Hirschman Index. Three variables were introduced as proxies for the choices made by Italian Regions with respect to the development and use of their DRG systems. The best finite mixture model identified three groups of hospitals, two of which sizeable. Of these, one included nearly all public hospitals, while the other was composed almost exclusively of small and medium‐sized investor‐owned hospitals. Averagely, private and smaller hospitals showed a stronger tendency to specialize over time. The positive impact of DRG funding on the hospitals' propensity to specialize found only limited empirical support. Moreover, it emerged as comparatively much smaller for public hospitals vis à vis private ones.