The impact of a diagnosis-related group-based prospective payment experiment: the experience of Shanghai

Abstract

The purpose of this study is to examine the impact of the 2004 and 2005 Diagnosis-Related Group (DRG)-based Prospective Payment Experiments (whereby a ceiling was set on per case payments for 15 DRGs) of the health insurance system in Shanghai using Differences-In-Differences (DID) and Differences-in-Differences-in-Differences (DDD) empirical strategies. The results show that the Length Of Stay (LOS) of all inpatients suffering from the target diseases during the two test periods responded quickly to the experiment (even though only insured inpatients living in Shanghai were eligible for the DRG-based experiments), thus implying that the DRG-based prospective payment system does not induce physicians to significantly reduce inpatient expenditures but does induce them to reduce the LOS of those suffering from the target diseases. Moreover, costs were shifted to uninsured inpatients suffering from the target diseases: their overall inpatient expenditures increased by 33.6 percentage points more than that of uninsured inpatients during the nontest period in 2005. Thus, the experiments were of limited effectiveness, and cost-shifting to uninsured inpatients was observed during at least the latter test period.