Heterogeneous effect of prospective payment system on hospital’s volume and quality
In early 2000s Japan introduced a special version of an inpatient prospective payment system (PPS) that contains incentives to increase efficiency and shorten the average length of stay (ALOS). This paper presents a theoretical model, which explains heterogeneous dynamics of volume and quality in a mixed PPS system. The model exploits two essential features of Japanese PPS: per diem payments and a length-of-stay dependent PPS tariff. The novelty of the model is that it incorporates hospitals heterogeneity through an explicit parameter of hospitals cost efficiency. The model predicts different directions of the change in ALOS for efficient and inefficient hospitals. Moreover, the decline in ALOS is shown to be associated with a rise in the rate for planned early readmissions. Using an administrative database for 684 Japanese PPS hospitals in 2007-2011, we conduct avearge treatment effect estimations with dynamic panel data and nd an empirical support for the predictions of the theoretical model.
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