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Heterogeneous hospital response to a per diem prospective payment system

  • Galina Besstremyannaya



The paper demonstrates the adverse effects of degressive rates, dependent on the percentiles of length of stay, in a prospective payment system with per diem payments. Using the dynamic panel data estimates with a recent nationwide administrative database for major diagnostic categories in 697 Japanese hospitals in July 2007- March 2012, the paper shows that average length of stay significantly increases (decreases) for hospitals in percentiles 0-25 (51-100) of the pre-reform length of stay. The decline of the average length of stay is larger for hospitals in higher percentiles of the length of stay. Hospitals in percentiles 51-100 significantly raise planned early readmission rate. As a remedy to the problem, the paper discusses the applicability of the “best practice” rate-setting.

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Paper provided by Center for Economic and Financial Research (CEFIR) in its series Working Papers with number w0193.

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Length: 31 pages
Date of creation: May 2013
Date of revision:
Handle: RePEc:cfr:cefirw:w0193
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  1. Jegers, Marc & Kesteloot, Katrien & De Graeve, Diana & Gilles, Willem, 2002. "A typology for provider payment systems in health care," Health Policy, Elsevier, vol. 60(3), pages 255-273, June.
  2. Galina Besstremyannaya, 2011. "Managerial performance and cost efficiency of Japanese local public hospitals: A latent class stochastic frontier model," Health Economics, John Wiley & Sons, Ltd., vol. 20(S1), pages 19-34, 09.
  3. Fujii, Mitsuru & Reich, Michael R., 1988. "Rising medical costs and the reform of Japan's health insurance system," Health Policy, Elsevier, vol. 9(1), pages 9-24.
  4. Grabowski, David C. & Afendulis, Christopher C. & McGuire, Thomas G., 2011. "Medicare prospective payment and the volume and intensity of skilled nursing facility services," Journal of Health Economics, Elsevier, vol. 30(4), pages 675-684, July.
  5. Ellis, Randall P. & McGuire, Thomas G., 1986. "Provider behavior under prospective reimbursement : Cost sharing and supply," Journal of Health Economics, Elsevier, vol. 5(2), pages 129-151, June.
  6. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
  7. Chalkley, Martin & Malcomson, James M., 2000. "Government purchasing of health services," Handbook of Health Economics, in: A. J. Culyer & J. P. Newhouse (ed.), Handbook of Health Economics, edition 1, volume 1, chapter 15, pages 847-890 Elsevier.
  8. Randall P. Ellis & Thomas G. McGuire, 1994. "Hospital Response to Prospective Payment: Moral Hazard, Selection, and Practice-Style Effects," Papers 0050, Boston University - Industry Studies Programme.
  9. Galina Besstremyannaya, 2013. "The impact of Japanese hospital financing reform on hospital efficiency: A difference-in-difference approach," The Japanese Economic Review, Japanese Economic Association, vol. 64(3), pages 337-362, 09.
  10. Mark McClellan, 1997. "Hospital Reimbursement Incentives: An Empirical Analysis," Journal of Economics & Management Strategy, Wiley Blackwell, vol. 6(1), pages 91-128, 03.
  11. Pope, Gregory C., 1989. "Hospital nonprice competition and medicare reimbursement policy," Journal of Health Economics, Elsevier, vol. 8(2), pages 147-172, June.
  12. Kondo, Akiko & Kawabuchi, Koichi, 2012. "Evaluation of the introduction of a diagnosis procedure combination system for patient outcome and hospitalisation charges for patients with hip fracture or lung cancer in Japan," Health Policy, Elsevier, vol. 107(2), pages 184-193.
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