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DRG prospective payment systems: refine or not refine?

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  • Elin Johanna Gudrun Hafsteinsdottir
  • Luigi Siciliani

Abstract

We present a model of contracting between a purchaser of health services and a provider (a hospital). We assume that hospitals provide two alternative treatments for a given diagnosis: a less intensive one (for example, a medical treatment) and a more intensive one (a surgical treatment). We assume that prices are set equal to the average cost reported by the providers, as observed in many OECD countries (yardstick competition). The purchaser has two options: (1) to set one tariff based on the diagnosis only and (2) to differentiate the tariff between the surgical and the medical treatment (i.e. to refine the tariff). We show that when tariffs are refined, the provider has always an incentive to overprovide the surgical treatment. If the tariff is not refined, the hospital underprovides the surgical treatment (and overprovides the medical treatment) if the degree of altruism is sufficiently low compared with the opportunity cost of public funds. Our main result is that price refinement might not be optimal. Copyright © 2009 John Wiley & Sons, Ltd.

Suggested Citation

  • Elin Johanna Gudrun Hafsteinsdottir & Luigi Siciliani, 2010. "DRG prospective payment systems: refine or not refine?," Health Economics, John Wiley & Sons, Ltd., vol. 19(10), pages 1226-1239.
  • Handle: RePEc:wly:hlthec:v:19:y:2010:i:10:p:1226-1239 DOI: 10.1002/hec.1547
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    References listed on IDEAS

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    Cited by:

    1. Gross, Christiane & Schübel, Thomas & Hoffmann, Rasmus, 2015. "Picking up the pieces—Applying the DISEASE FILTER to health data," Health Policy, Elsevier, vol. 119(4), pages 549-557.
    2. Jurgita Januleviciute & Jan Erik Askildsen & Oddvar Kaarboe & Luigi Siciliani & Matt Sutton, 2016. "How do Hospitals Respond to Price Changes? Evidence from Norway," Health Economics, John Wiley & Sons, Ltd., vol. 25(5), pages 620-636, May.
    3. Rosella Levaggi & Michele Moretto & Paolo Pertile, 2012. "DRGs: the link between investment in technologies and appropriateness," Working Papers 31/2012, University of Verona, Department of Economics.
    4. Martin Chalkley, 2012. "Contracts, Information and Incentives in Health Care," Chapters,in: The Elgar Companion to Health Economics, Second Edition, chapter 22 Edward Elgar Publishing.
    5. Martin Chalkley, 2012. "Contracts, Information and Incentives in Health Care," Chapters,in: The Elgar Companion to Health Economics, Second Edition, chapter 22 Edward Elgar Publishing.
    6. Levaggi, Rosella & Moretto, Michele & Pertile, Paolo, 2014. "Two-part payments for the reimbursement of investments in health technologies," Health Policy, Elsevier, vol. 115(2), pages 230-236.

    More about this item

    JEL classification:

    • H42 - Public Economics - - Publicly Provided Goods - - - Publicly Provided Private Goods
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I18 - Health, Education, and Welfare - - Health - - - Government Policy; Regulation; Public Health
    • L13 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Oligopoly and Other Imperfect Markets

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