Hospital reimbursement in the presence of cherry picking and upcoding
This research explores a framework that uses game theory to reveal some unintended consequences that stem from efforts to reduce cherry picking and other profit-seeking practices in hospitals. The study's findings offer a better understanding of hospital incentives, resulting in improved system efficiency for better health and social outcomes.
The challenge:
For more than 30 years, throughout the developed world, hospitals have been reimbursed for treating patients in a way that includes incentives to keep costs down. This reimbursement scheme, based on patient diagnosis related groups (DRGs), has proved effective, but also has its drawbacks. One problem is known as “cherry picking” – that is, favouring patients with diagnoses that will bring in higher reimbursements for relatively lower costs. A related problem is that efforts to reduce cherry picking are increasing another distortion known as “upcoding” – that is, assigning patients to higher paying DRGs than necessary.
This research explores a framework that uses game theory to reveal some unintended consequences that stem from efforts to reduce cherry picking and other profit-seeking practices in hospitals. The study's findings offer a better understanding of hospital incentives, resulting in improved system efficiency for better health and social outcomes.
The challenge:
For more than 30 years, throughout the developed world, hospitals have been reimbursed for treating patients in a way that includes incentives to keep costs down. This reimbursement scheme, based on patient diagnosis related groups (DRGs), has proved effective, but also has its drawbacks. One problem is known as “cherry picking” – that is, favouring patients with diagnoses that will bring in higher reimbursements for relatively lower costs. A related problem is that efforts to reduce cherry picking are increasing another distortion known as “upcoding” – that is, assigning patients to higher paying DRGs than necessary.
The research:
The researchers develop a theoretical framework based on hospitals’ prevailing reimbursement scheme (with DRGs) that takes into account the presence of cherry picking and upcoding. Unlike previous research, this new model is focused on the interaction between cherry picking and upcoding.
The impact:
The research casts doubt on the effectiveness of recent efforts to reduce cherry picking incentives. It also shows the hospital market bifurcating into two groups of providers: generalists that treat patients efficiently and specialists that tend to drop expensive patients and underinvest in cost reductions. Finally, a potential solution based on input statistics that consider the distribution of patients treated for each DRG is proposed.
In sum, the researchers’ new model can offer a better understanding of hospital incentives, which can help regulators improve system efficiency for better health and social outcomes.
