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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.

Suggested Citation

  • David Dranove, 1987. "Rate-Setting by Diagnosis Related Groups and Hospital Specialization," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 417-427, Autumn.
  • Handle: RePEc:rje:randje:v:18:y:1987:i:autumn:p:417-427
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    Cited by:

    1. 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.
    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. Faure-Grimaud, A. & Reiche, S., 2006. "Dynamic yardstick mechanisms," Games and Economic Behavior, Elsevier, vol. 54(2), pages 316-335, February.
    4. Shigeoka, Hitoshi & Fushimi, Kiyohide, 2014. "Supplier-induced demand for newborn treatment: Evidence from Japan," Journal of Health Economics, Elsevier, vol. 35(C), pages 162-178.
    5. David Meltzer & Jeanette Chung, 2002. "Effects of Competition Under Prospective Payment on Hospital Costs Among High- and Low-Cost Admissions: Evidence from California, 1983 and 1993," NBER Chapters,in: Frontiers in Health Policy Research, Volume 5, pages 53-102 National Bureau of Economic Research, Inc.
    6. Kifmann, Mathias & Siciliani, Luigi, 2014. "Average-cost pricing and dynamic selection incentives in the hospital sector," hche Research Papers 2014/08, University of Hamburg, Hamburg Center for Health Economics (hche).
    7. Makoto Kakinaka & Ryuta Kato, 2013. "Regulated medical fee schedule of the Japanese health care system," International Journal of Health Economics and Management, Springer, vol. 13(3), pages 301-317, December.
    8. Maqbool Dada & William D. White, 1999. "Evaluating Financial Risk in the Medicare Prospective Payment System," Management Science, INFORMS, vol. 45(3), pages 316-329, March.
    9. Hanjo M. Koehler, 2006. "Yardstick Competition when Quality is Endogenous: The Case of Hospital Regulation," Working Papers 013, Bavarian Graduate Program in Economics (BGPE).
    10. 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.
    11. 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.
    12. Leemore S. Dafny, 2003. "How Do Hospitals Respond to Price Changes?," NBER Working Papers 9972, National Bureau of Economic Research, Inc.
    13. 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.
    14. 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.
    15. 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.
    16. Schreyögg, Jonas, 2004. "The Taiwanese health care system under efficiency scrutiny," Discussion Papers 2004/17, Technische Universität Berlin, School of Economics and Management.
    17. repec:clh:resear:v:2:y:2009:i:5 is not listed on IDEAS
    18. Leemore S. Dafny, 2005. "How Do Hospitals Respond to Price Changes?," American Economic Review, American Economic Association, vol. 95(5), pages 1525-1547, December.
    19. Randall P. Ellis & Bruno Martins & Michelle McKinnon Miller, 2015. "Provider Payment Methods and Incentives," Boston University - Department of Economics - Working Papers Series wp2015-023, Boston University - Department of Economics.
    20. Tsuyoshi Takahara, 2016. "Patient dumping, outlier payments, and optimal healthcare payment policy under asymmetric information," Health Economics Review, Springer, vol. 6(1), pages 1-11, December.
    21. 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.
    22. Faure-Grimaud, Antoine & Reiche, Sonje, 2003. "Dynamic yardstick regulation," LSE Research Online Documents on Economics 19319, London School of Economics and Political Science, LSE Library.
    23. 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.
    24. 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.
    25. 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.

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