Prospective payment system : consequences for hospital-physician interactions in the private sector

In 2004, French health authorities plan to introduce a prospective payment system for hospitals delivering acute care based on the DRG classification system. In this paper, we analyze the consequences of this switch from a retrospective to a prospective payment system on the ability of physicians and hospital managers to coordinate their activity in the production of hospital stays. Our analysis follows those of Dor and Watson (1995) and Custer et al. (1990) but is adapted to the context of the French hospital private sector. Different types of interactions are considered : non-cooperative, dominant-reactive, and cooperative. The main result of this analysis is that, in a context in which average per-patient fees are maintained, the change of payment system is potentially gainful for both partners. Although their fees are not concerned by the reform, physicians are even in a better position than hospitals tot ake advantage of the change of payment system. A minimum level of coordination is nevertheless required, i.e. either cooperative or dominant-reactive interactions. Furthermore, two elements limits the importance of these potential gains : these are only one-shot gains and hence depend on the ability to reduce the length of hospital stays. Finally, some extensions regarding competition between public and private hospitals and negotiation issues are discussed.