Question

1. Hospitals

Hospitals respond strategically to the way they are reimbursed. For-profit hospitals seek to maximize revenues and minimize costs in order to maximize profit. Not-for-profit hospitals also seek to maximize revenues, but have no incentive to minimize costs. However, they may seek to minimize the costs of patient care in ways that allow them to increase the prestige of the hospital (e.g. by purchasing expensive new medical technology.)

Hence, for-profit and not-for-profit hospitals are likely to respond to reimbursement mechanisms in similar ways with respect to:

• the number of patients admittedto the hospital annually
• the average length of stay(hospital days) per patient
• the average number ofservicesprovided to each patient

For each of the following reimbursement mechanisms, identify how hospitals are likely to adjust admissions,length of stay, and services per patientin response to the financial incentives.

1. Fee-for-service– the hospital is reimbursed an amount for every service provided to every patient
2. Per diem–  the hospital is reimbursed a fixed amount for every day a patient spends in the hospital, regardless of what services the patient receives
3. Global budget– the hospital receives a fixed amount per year, regardless of how many patients are treated, or how many services are provided
4. DRGs – the hospital receives an amount for each patient admitted, according to the severity of their diagnosis    

Answer 1

a Fee-for-service: Hospital will try to maximise the admission per patient in the hospital since if they will admit more patients then they will get more reimbursement per each service per each patient they provide and they will try to increase the length of stay since due to increased length of stay patient will ask or will be given more services.

b Per diem- Due to fixed amount reimbursed per day of stay of the patient, Hospital will try to increase the length of stay of the patient in the hospital and Hospital will also try to admit more and more patients due to this fixed amount of per day stay of the patient since this will help hospital to increase its revenue also and but this fixed reimbursement will not incentivise the hospital to increase the services per patient because the fixed reimbursement amount is not paid basis what services they provide to patient.

c Global budget will not incentivise the hospital to increase the patient admission, length of stay and services per patient because global budget is the fixed amount per year which is not related to number of patients treated and number of services provided.

d DRG's(Diagnosis Related Group's): In this hospital's are reimbursed fixed amount per group regardless of the cost incurred and will try to increase services per patient since they will be paid fixed amount as per DRG's in order to get incentivised but they will not take much interest in increasing the admission and length of stay of the patient since they will not get financially incentivised/reimbursed basis these two options.