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Has the DRG System Influenced the Efficiency of Diagnostic Technology in Portugal?

Listed author(s):
  • Vania Sena
  • Clara Dismuke
Registered author(s):

    The use of Diagnostic Related Groups (DRG) as a mechanism for hospital financing is a currently debated topic in Portugal. The DRG system was scheduled to be initiated by the Health Ministry of Portugal on January 1, 1990 as an instrument for the allocation of public hospital budgets funded by the National Health Service (NHS), and as a method of payment for other third party payers (ex. Public Employees (ADSE), private insurers, etc.). Based on experience from other countries such as the United States, it was expected that implementation of this system would result in more efficient hospital resource utilisation and a more equitable distribution of hospital budgets. However, in order to minimise the potentially adverse financial impact on hospitals, the Portuguese Health Ministry decided to gradually phase in the use of the DRG system for budget allocation by using blended hospital-specific and national DRG case-mix rates. Since implementation in 1990, the percentage of each hospital's budget based on hospital specific costs was to decrease, while the percentage based on DRG case-mix was to increase. This was scheduled to continue until 1995 when the plan called for allocating yearly budgets on a 50% national and 50% hospital-specific cost basis. While all other non- NHS third party payers are currently paying based on DRGs, the adoption of DRG case-mix as a National Health Service budget setting tool has been slower than anticipated. There is now some argument in both the political and academic communities as to the appropriateness of DRGs as a budget setting criterion as well as to their impact on hospital efficiency in Portugal. This paper uses a two-stage procedure to assess the impact of actual DRG payment on the productivity (through its components, i.e. technological change and technical efficiency change) of diagnostic technology in Portuguese hospitals during the years 1992-1994, using both parametric and non-parametric frontier models. We find evidence that the DRG payment system does appear to have had a positive impact on productivity and technical efficiency of some commonly employed diagnostic technologies in Portugal during this time span.

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    Paper provided by Department of Economics, University of York in its series Discussion Papers with number 98/6.

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    Date of creation:
    Handle: RePEc:yor:yorken:98/6
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    Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom

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    1. 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.
    2. Zuckerman, Stephen & Hadley, Jack & Iezzoni, Lisa, 1994. "Measuring hospital efficiency with frontier cost functions," Journal of Health Economics, Elsevier, vol. 13(3), pages 255-280, October.
    3. Charnes, A. & Cooper, W. W. & Rhodes, E., 1978. "Measuring the efficiency of decision making units," European Journal of Operational Research, Elsevier, vol. 2(6), pages 429-444, November.
    4. Vitaliano, Donald F. & Toren, Mark, 1994. "Cost and efficiency in nursing homes: a stochastic frontier approach," Journal of Health Economics, Elsevier, vol. 13(3), pages 281-300, October.
    5. Kooreman, Peter, 1994. "Nursing home care in The Netherlands: a nonparametric efficiency analysis," Journal of Health Economics, Elsevier, vol. 13(3), pages 301-316, October.
    6. 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.
    7. Newhouse, Joseph P., 1994. "Frontier estimation: How useful a tool for health economics?," Journal of Health Economics, Elsevier, vol. 13(3), pages 317-322, October.
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