Reimbursement Schemes for Hospitals : Theory and Evidence from Germany

In 2003, Germany switched from a fee-for-service (FFS) system to a fixed-fee prospective payment system (PPS) in reimbursement schemes for hospitals. In close cooperation with two hospitals in Germany we have compiled a data set to analyze the impacts of the new system on the length of stay in hospital (LOS) and on quality measured by the sum of complications occurring in hospital and readmissions. A simple theoretical model structures the relevant trade-offs and shows that the new system is likely to reduce LOS, but will also set higher effort incentives for quality improvement. Both predictions are confirmed by the data: When controlling for different kinds of risk factors, the new system leads to a lower LOS, but also to lower complication and readmission rates. The positive quality effect becomes even more pronounced for high-risk patients. Our paper thus contradicts widely dispersed fears in Germany that in particular old and high-risk patients may suffer from the new system as they will be treated insufficiently and discharged inefficiently early (bloody discharges)