Differential effects of declining rates in a per diem payment system
he paper demonstrates differential effects of a prospective payment system with declining per diem rates, dependent on the percentiles of length of stay. The analysis uses dynamic panel data estimates and a recent nationwide administrative database for major diagnostic categories in 1068 Japanese hospitals in 2006–2012 to show that average length of stay significantly increases for hospitals in percentiles 0–25 of the pre‐reform length of stay and significantly decreases for hospitals in percentiles 51–100. The decline of the average length of stay is larger for hospitals in higher percentiles of the length of stay. Hospitals in percentiles 51–100 significantly increase their rate of nonemergency/unanticipated readmissions within 42 days after discharge. The decline in the length of total episode of treatment is smaller for hospitals in percentiles 0–25. The findings are robust in terms of the choice of a cohort of hospitals joining the reform. The paper discusses applicability of ‘best practice’ rate‐setting to help improve the performance of hospitals in the lowest quartile of average length of stay.