Theoretical Analysis of Hospitals’ Response to a Per Diem Prospective Payment System

Seoul Journal of Economics, Vol. 34, No. 2, 2021

32 Pages Posted: 1 Jun 2021

See all articles by Dmitry Shapiro

Dmitry Shapiro

Department of Economics, Seoul National University

Date Written: May 30, 2021

Abstract

Japan has one of the longest average length of stay in hospital (ALOS) among developed countries. To curb the high ALOS, the Ministry of Health, Labor and Welfare has launched a payment system reform where instead of the pre-reform fee-for-service system (FFS) a new per-diem prospective payment system (DPC/PDPS) has been gradually adopted. We develop a theoretical framework to model hospitals’ incentives under different payment systems and to study the impact of the reform on the ALOS. We show that hospitals with a longer (shorter) pre-reform ALOS shorten (lengthen) their post-reform ALOS. Furthermore, hospitals with longer prereform ALOS have stronger incentives to use planned readmission to decrease the post-reform length of stay associated with a single admission. The theoretical predictions of our model match empirical evidence from the literature.

Keywords: Health care financing, Prospective payment system, per-diem rate, length of stay, readmission rate

JEL Classification: I12, I18, D21, D22

Suggested Citation

Shapiro, Dmitry, Theoretical Analysis of Hospitals’ Response to a Per Diem Prospective Payment System (May 30, 2021). Seoul Journal of Economics, Vol. 34, No. 2, 2021, Available at SSRN: https://ssrn.com/abstract=3857467

Dmitry Shapiro (Contact Author)

Department of Economics, Seoul National University ( email )

San 56-1, Silim-dong, Kwanak-ku
Seoul 151-742

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