Making incentives work: Hospital organisation and performance

Abstract

In 1997, financing of Norwegian hospitals was changed to a combination of block grants and activity-based reimbursements. Since then, many hospitals have also reorganised their internal structures, for instance by implementing activity-based budgets at the departmental level. The purpose of this study is to investigate the impact of departmental activity-based budgets on overall hospital productivity and unit costs. The analysis is based on register data on hospital admissions and hospital input factors, along with survey data on internal organisation of hospitals. Fixed-effects regression models are applied for the analysis. The main results indicate that hospitals with departmental activity-based budgets and department authority have higher productivity. The effect on unit costs is insignificant. The positive effect of the departmental activity-based budgets and departmental authority on productivity without increase in costs may indicate that providing incentives at lower hospital levels such as departments could be a useful tool for increasing overall hospital productivity and cost efficiency.