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Average-cost Pricing and Dynamic Selection Incentives in the Hospital Sector

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  • Mathias Kifmann
  • Luigi Siciliani

Abstract

This study investigates hospitals’ dynamic incentives to select patients when hospitals are remunerated according to a prospective payment system of the DRG type. Given that prices typically reflect past average costs, we use a discrete-time dynamic framework. Patients differ in severity within a DRG. Providers are to some extent altruistic. For low altruism, a downward spiral of prices is possible which induces hospitals to focus on low-severity cases. For high altruism, dynamic price adjustment depends on relation between patients’ severity and benefit. In a steady state, DRG prices are unlikely to give optimal incentives to treat patients.

Suggested Citation

  • Mathias Kifmann & Luigi Siciliani, 2014. "Average-cost Pricing and Dynamic Selection Incentives in the Hospital Sector," CESifo Working Paper Series 4977, CESifo Group Munich.
  • Handle: RePEc:ces:ceswps:_4977
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    References listed on IDEAS

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    Cited by:

    1. Bertoli, Paola & Grembi, Veronica, 2017. "The political economy of diagnosis-related groups," Social Science & Medicine, Elsevier, vol. 190(C), pages 38-47.

    More about this item

    Keywords

    hospitals; DRGs; selection; severity;

    JEL classification:

    • 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
    • L44 - Industrial Organization - - Antitrust Issues and Policies - - - Antitrust Policy and Public Enterprise, Nonprofit Institutions, and Professional Organizations

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