Incentive Oriented Reimbursement of Hospitals with a Prospective Payment System

The introduction of a DRG-based prospective payment system (PPS) for German hospitals causes a fundamental change of the incentive structure of hospitals. Making use of the agency theory, the present paper examines the effects of PPS on the efficiency and the quality of the provision of hospital services and describes some approaches to minimize the undesirable effects. The main focus lies on risk selection and to optimizing the quality of treatment. As result it can be stated, that a pure prospective payment system on the basis of average costs is not optimal in the case of asymmetrical information with regard to costs and quality of treatment. A mixed reimbursement system which consists of both a prospective and a retrospective component is superior.