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Does prospective payment reduce inpatient length of stay?

  • Edward C. Norton

    (Department of Health Policy and Administration, School of Public Health, University of North Carolina at Chapel Hill, USA)

  • Courtney Harold Van Houtven

    (Cecil G. Sheps Center for Health Services Research, University of North Carolina at Chapel Hill, USA)

  • Richard C. Lindrooth

    (Center for Health Industry Market Economics, Kellogg School of Management, Northwestern University, USA)

  • Sharon-Lise T. Normand
  • Barbara Dickey

    (Department of Psychiatry, The Cambridge Hospital, Harvard Medical School, USA)

A change in payment mechanism for inpatient care from per diem to per episode creates two incentives - a marginal and an average price effect - to change length of stay. The decrease in marginal price per day to zero should reduce the length of stay, while an increase in average price per inpatient stay should increase the length of stay. This study uses data from a natural experiment to estimate both marginal and average price elasticities, and to test whether the length of stay falls after the introduction of prospective payment in a sample of 8509 severely mentally ill patients. We estimate that the marginal price elasticity is zero, but the average price elasticity is between 0.16 and 0.20. The results were generally robust for short- and long stayers, and for persons admitted early and late after the change in payment mechanism. The model controlled for hospital fixed effects and individual random effects. Copyright © 2002 John Wiley & Sons, Ltd.

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File URL: http://hdl.handle.net/10.1002/hec.675
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Article provided by John Wiley & Sons, Ltd. in its journal Health Economics.

Volume (Year): 11 (2002)
Issue (Month): 5 ()
Pages: 377-387

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Handle: RePEc:wly:hlthec:v:11:y:2002:i:5:p:377-387
Contact details of provider: Web page: http://www3.interscience.wiley.com/cgi-bin/jhome/5749

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  1. Cutler, D.M., 1992. "The Incidence of Adverse Medical Outcome Under Prospective Payment," Harvard Institute of Economic Research Working Papers 1603, Harvard - Institute of Economic Research.
  2. Frank, Richard G. & McGuire, Thomas G., 2000. "Economics and mental health," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 16, pages 893-954 Elsevier.
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  7. Hodgkin, Dominic & McGuire, Thomas G., 1994. "Payment levels and hospital response to prospective payment," Journal of Health Economics, Elsevier, vol. 13(1), pages 1-29, March.
  8. Ellis, Randall P. & McGuire, Thomas G., 1996. "Hospital response to prospective payment: Moral hazard, selection, and practice-style effects," Journal of Health Economics, Elsevier, vol. 15(3), pages 257-277, June.
  9. Rogerson, William P, 1994. "Choice of Treatment Intensities by a Nonprofit Hospital under Prospective Pricing," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 3(1), pages 7-51, Spring.
  10. 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.
  11. Breusch, T S & Pagan, A R, 1980. "The Lagrange Multiplier Test and Its Applications to Model Specification in Econometrics," Review of Economic Studies, Wiley Blackwell, vol. 47(1), pages 239-53, January.
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