Reimbursement schemes for hospitals: the impact of case and firm characteristics

We contribute to the debate on high-powered versus low-powered incentives in regulation by studying their heterogeneous impacts on different subpopulations, using data from the introduction of a high-powered prospective payment system (PPS) for hospital reimbursement in Germany. While no overall effect on quality or cost saving is found, our results support hypotheses drawn from an incentive and selection perspective: PPS reduces the length of stay of older relative to younger patients, of more severe relative to less severe cases, and in smaller relative to larger hospitals. Hospitals which adopted PPS earlier provide higher quality under PPS as proxied by the case-specific readmission rate. Our study also contributes to the health economic literature on hospital reimbursement as our data permits us to identify the treatment effect via different timings of adoption of PPS and to use a more accurate quality measure by following patients even when readmitted to other hospitals.