SIER Working Paper Series

Motivated by the Japanese PPS reform, aimed at curbing high length of stay in Japanese hospitals, we develop a theoretical model to study how hospitals’ ?nancial incentives differ between the two reimbursement systems: a pre-reform fee-for-service (F F S); and a post reform length-of-stay-dependent stepwise decreasing per diem rate (SDR). First, we show that hospitals with shorter (longer) average length of stay under F F S have longer (shorter) average length of stay under SDR. Second, we show that hospitals with longer stay under the F F S reimbursement system are more likely to use planned readmission in order to decrease the length of stay associated with a single admission. Finally, we show that profit-wise, it is hospitals with the shortest pre-reform length of stay who gain from a change to the SDR reimbursement rule. The theoretical predictions of our model closely match empirical evidence from the literature.

Keywords: Health care financing, Prospective payment system, per-diem rate, length of stay, readmission rate

JEL classification: I12, I18, C23, D21, D22