DP10155 Average-cost Pricing and Dynamic Selection Incentives in the Hospital Sector

Author(s): Mathias Kifmann, Luigi Siciliani
Publication Date: September 2014
Keyword(s): DRGs, hospitals, selection, severity
JEL(s): I11, I18, L13, L44
Programme Areas: Industrial Organization
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10155

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.