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Seoul Journal of Economics - Vol. 35 , No. 2

[ Article ]
Seoul Journal of Economics - Vol. 34, No. 2, pp. 171-202
Abbreviation: SJE
ISSN: 1225-0279 (Print)
Print publication date 30 May 2021
Received 10 Mar 2020 Revised 21 Oct 2020 Accepted 26 Oct 2020

Theoretical Analysis of Hospitals’ Response to a Per Diem Prospective Payment System
Dmitry Shapiro
Dmitry Shapiro, Associate Professor, Department of Economics and the SNU Institute of Economic Research, Seoul National University, 1 Gwanak-ro, Gwanak-gu, Seoul, 08826, Korea, Tel: 82-2-880-2287 (

Funding Information ▼

JEL Classification: I12, I18, D21, D22


Japan has one of the longest average length of stay in hospital (ALOS) among developed countries. To curb the high ALOS, the Ministry of Health, Labor and Welfare has launched a payment system reform where instead of the pre-reform fee-for-service system (FFS) a new per-diem prospective payment system (DPC/PDPS) has been gradually adopted. We develop a theoretical framework to model hospitals’ incentives under different payment systems and to study the impact of the reform on the ALOS. We show that hospitals with a longer (shorter) pre-reform ALOS shorten (lengthen) their post-reform ALOS. Furthermore, hospitals with longer prereform ALOS have stronger incentives to use planned readmission to decrease the post-reform length of stay associated with a single admission. The theoretical predictions of our model match empirical evidence from the literature.

Keywords: Health care financing, Prospective payment system, per-diem rate, length of stay, readmission rate


Financial support from the Housing and Commercial Bank Economic Research Fund for Institute of Economic Research of Seoul National University and the Creative-Pioneering Researchers Program through Seoul National University is gratefully acknowledged. Comments by an anonymous referee are particularly appreciated.

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