Readmission and Hospital Quality under Different Payment Regimes

Recent health-care policies in OECD countries seem to consider hospital readmissions quality-dependent. In this paper, we study the incentives for hospitals to provide quality and cost-reducing effort under different payment regimes – either a retrospective or a prospective payment system – explicitly considering the role played by financial incentives linked to readmissions. In line with the general wisdom, we find that prospective payment systems do not perform better than retrospective systems, especially if the payment to the hospital is not adjusted to further enhance the incentive for the quality of care. More specifically, if the hospital receives full payment for readmitted patients, moving from a retrospective to a prospective payment system could induce a reduction in quality and, in turn, an increase in readmissions. However, if the prospective system is adjusted to internalize this counterincentive via a reduced payment for readmitted patients, it could foster higher treatment quality.