Technological Adoption in Health Care – The Role of Payment Systems

Abstract This paper examines the incentive to adopt a new technology resulting from common payment systems, namely mixed cost reimbursement and DRG reimbursement. Adoption is based on a cost–benefit criterion. We find that retrospective payment systems require a large enough patient benefit to yield adoption, while under DRG-linked payment, adoption may arise in the absence of patients benefits when the differential reimbursement for the old vs new technology is large enough. Also, mixed cost reimbursement leads to higher adoption under conditions on the differential reimbursement levels and patient benefits. In policy terms, mixed cost reimbursement system may be more effective than a DRG payment system to induce technology adoption. Our analysis also shows that current economic evaluation criteria for new technologies do not capture the different ways payment systems influence technology adoption. This gives a new dimension to the discussion of prospective vs retrospective payment systems of the last decades centered on the debate of quality vs cost containment.