Cost and benefit of hospital financing system reforms in OECD countries

In the past three decades, many developed countries have changed the manner in which hospitals were financed. Although it has been hypothesized that the way in which healthcare providers are reimbursed may affect their performance and thereby population health, there is little empirical literature on this. This study uses aggregate level panel data coming from 20 OECD countries covering 30 years to explore the impact of these reforms on indicators of healthcare output and mortality. We first classified hospital financing systems based on whether they depend purely on hospital characteristics (fixed budget) or also on the service they provide (activity based, AC). In a second step we tried to differentiate within activity based financing: a) fee-for-service (FFS), which is purely based on the quantity of services provided, or b) Patient-based payment (PBP), in which activities are linked to patients. The data is analysed using a standard difference-in-difference (DID) model with country and year specific fixed effects and a variant of it, which allows for a structural change in the outcome due to a reform. Although the standard DID models did not yield any significant results, the DID models allowing for structural changes in the outcome indicated that activity based financing increases the growth rate of health care output while accelerating the growth of life expectancy at age 65. Again, the standard DID model did not yield any significant results if we differentiate between FFS and PBP. However, differentiation between FFS and PBP indicated that the positive effect on life expectancy at age 65 is probably caused by PBP.

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