incentive problems

In 2012, Switzerland changed from retrospective to prospective hospital payment based on diagnosis related groups (DRGs), following the example of the United States, Australia, and Germany. As in these countries, the objective of this transition was to motivate hospitals to improve efficiency by making them bear financial risk to some extent. This contribution seeks to find out whether SwissDRG, the Swiss version of DRG payment, indeed provides hospitals with appropriate incentives, thus creating a level playing field enabling workable competition between them. Three conditions for creating a level playing are stated, of which the first is tested using data on some 757 000 patient cases treated by 93 hospitals in the year 2012. The evidence suggests that hospital payment as currently devised by SwissDRG fails to create a level playing field. Differences in margins over cost of treatment can be traced to a hospital’s portfolio of specialties and mix of patients, both of which are largely beyond their control. The findings of this paper are subject to several limitations. The true DRG-specific cost distributions (and hence expected values) are not known; moreover, emphasis has been on variable cost, neglecting fixed (capital user) cost. Finally, hospitals with a high amount of capital user cost may well benefit from modern technology contributing to their efficiency in terms of variable cost. The finding that current hospital financing by SwissDRG fails to create a level playing field is likely to be robust, calling for an expeditious adjustment be-cause hospitals are exposed to financial risk to a greatly differing degree. It may be appropriate for them to purchase insurance against their financial risk, which is largely driven by influences beyond their control.