READMISSION AND HOSPITAL QUALITY UNDER PROSPECTIVE PAYMENT SYSTEM

In this paper we study the incentives for hospitals to provide quality and cost-reducing effort underdifferent payment regimes, either a global budgeting or a prospective payment system. In addition, wealso consider the role played by financial incentives directly linked to some measure of outcome, suchas readmissions, like in a pay-for-performance system. As far as the specific results about the incentivesto provide quality are concerned, we find that prospective payment systems do not necessarily performbetter than retrospective systems if the reimbursement to hospitals is not adjusted to take into accountspecific measures of quality, such as readmissions. More specifically, within the setting of our model, ifpatients readmitted are fully paid to hospitals, moving from global budgeting to a prospective paymentsystem might even induce a reduction on quality and, in turn, an increase in readmission probability.However, if the prospective payment system is adjusted for internalizing this counter-incentive, by adifferent payment for patients readmitted, it could be able to foster a higher hospital quality through thecompetition channel.