Buying efficiency: optimal hospital payment in the presence of double upcoding

Simon B Spika,Peter Zweifel

doi:10.1186/s13561-019-0256-4

Simon B Spika, Peter Zweifel

Open Access

https://doi.org/10.1186/s13561-019-0256-4

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Abstract

BackgroundWith DRG payments, hospitals can game the system by ’upcoding’ true patient’s severity of illness. This paper takes into account that upcoding can be performed by the chief physician and hospital management, with the extent of the distortion depending on hospital’s internal decision-making process. The internal decision making can be of the principal-agent type with the management as the principal and the chief physician as the agent, but the chief physicians may be able to engage in negotiations with management resulting in a bargaining solution.ResultsIn case of the principal-agent mechanism, the distortion due to upcoding is shown to accumulate, whereas in the bargaining case it is avoided at the level of the chief physician.ConclusionIn the presence of upcoding it may be appropriate for the sponsor to design a payment system that fosters bargaining to avoid additional distortions even if this requires extra funding.

Highlights

Ever since the introduction of DRG payment of hospitals, there have been concerns about the truthfulness of their reporting
Upcoding strategies result in reimbursement that is higher than required for efficiency, and the sponsor of hospital services needs information on whether and to what extent upcoding occurs in order to take appropriate countermeasures
Upcoding is an issue affecting all hospital payment systems that offer a higher reimbursement for more severe cases

Summary

Introduction

Ever since the introduction of DRG payment of hospitals, there have been concerns about the truthfulness of their reporting. Because hospitals establish severity of illness, they are suspected by their sponsors to game the system by exaggerating true severity in an attempt to optimize revenue, by so-called ’upcoding’. DRG payment is frequently supplemented by monitoring and sanctions that apply when false or biased reporting is detected. With DRG payments, hospitals can game the system by ’upcoding’ true patient’s severity of illness. This paper takes into account that upcoding can be performed by the chief physician and hospital management, with the extent of the distortion depending on hospital’s internal decision-making process. The internal decision making can be of the principal-agent type with the management as the principal and the chief physician as the agent, but the chief physicians may be able to engage in negotiations with management resulting in a bargaining solution

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