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Heterogeneity of Hospitals

Authors
  • Dormont, B.
Type
Book
Journal
Encyclopedia of Health Economics
Publication Date
Jan 01, 2014
Pages
456–461
Identifiers
DOI: 10.1016/B978-0-12-375678-7.01314-6
ISBN: 978-0-12-375678-7
Source
Elsevier
Keywords
License
Unknown

Abstract

Payment methods based on a fixed price per diagnosis related group provide hospitals with a perfect incentive for cost reduction. However, costs can rise for some hospitals because of exogenous factors. This situation may bring them to select patients and lower care quality to avoid bankruptcy. To prevent this, payments should allow for legitimate sources of cost heterogeneity. It is possible to design a payment method which allows for unobservable sources of cost heterogeneity, provided they are time invariant. While it reimburses hospitals for extra costs resulting from undesirable long-term moral hazard, this method can induce substantial savings because it provides incentives to reduce costs linked to transitory moral hazard.

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