Hospital response to DRG refinements: the impact of multiple reimbursement incentives on inpatient length of stay

Abstract

Recent research has warned that the introduction of Diagnosis Related Groups (DRGs) based on hospital treatment decisions will lead to an increase in the rate of marginal procedures and to a resumption of high medical expenditure growth rates. This paper explores the often contradictory effects of the multiple reimbursement incentives created by refinements to the Prospective Payment System (PPS) (principally, the introduction of procedure-based DRGs) on hospital resource allocation. Three effects are examined in the paper: (i) the change in primary or payment-related procedures owing to marginal reimbursement incentives; (ii) the change in secondary or non-payment-related services owing to average price incentives; and (iii) the change in average severity of both medical and surgical admissions. The model suggests that the anticipated positive effect of marginal reimbursement incentives on overall hospital resource use may be offset by several factors, most notably the lower average payment incentives of non-procedural DRGs.

Performance Management and Public Sector Reform: The Norwegian Hospital Reform

“…The problem is that this kind of activity can reduce capacity for the treatment of other, more serious illnesses, such as cancer surgery or advanced ear surgery. Treatments that are complex, demanding and long-term may thus be given less priority (Gilman 2000), while treatment may be biased towards procedures with marginal costs that are lower than real treatment costs. This situation represents a major challenge to health care priorities (Kvaernes 2004).…”

How Do Hospitals Respond to Price Changes?

“…My primary empirical objective is to test this prediction explicitly by 6 This model is based on Dranove (1987), Hodgkin and McGuire (1994), Ellis and McGuire (1996), and Gilman (2000). 7 I adopt the definition of Bulow, Geanakoplos, and Klemperer (1985) by using 0…”

“…Gilman (2000) investigates the impact of a 1994 reform to Medicaid DRGs for HIV diagnoses in New York. He finds that length of stay increased in procedure-based DRGs, which were subject to price increases, and decreased in 13 Hodgkin and McGuire (1994) provide an excellent overview of empirical research on this subject.…”

Price Changes in Regulated Healthcare Markets: Do Public Hospitals Respond and How?

“…Newhouse, 1989;Cutler, 1995;Gilman, 2000). Dafny (2005) circumvents this problem by exploring the response of hospitals to changes in DRG prices in the post-PPS era.…”

“…Some evidence is available on the impact of changes in average payment levels on the behaviour of hospitals operating in market-oriented institutional settings (e.g. Gilman, 2000;Dafny, 2005;Lindrooth et al, 2007;He and Mellor, 2012). However, very little is known on the effect in national health-care systems, where the response of public hospitals to DRG price changes can hardly be determined a priori (Januleviciute et al, 2015).…”