Current Issue

Seoul Journal of Economics - Vol. 34 , 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.

1. Anderson, G., & Ikegami, N. How can Japan’s DPC inpatient hospital payment system be strengthened. Lessons from the US Medicare prospective system. A report of the CSIS global health policy center, 2011.
2. Annear, P. L., Kwon, S., Lorenzoni, L., Duckett, S., Huntington, D., Langenbrunner, J. C., Murakami Y., Shon C., & Xu, K. “Pathways to DRG-based hospital payment systems in Japan, Korea, and Thailand.” Health Policy 122 (No. 7 2018): 707-713.
3. Ashton, C. M., Del Junco, D. J., Souchek, J., Wray, N. P., & Mansyur, C. L. “The association between the quality of inpatient care and early readmission: a meta-analysis of the evidence.” Medical care (1997): 1044-1059.
4. Besstremyannaya, G. “Differential Effects of Declining Rates in a Per Diem Payment System.” Health Economics 25 (No. 12 2016): 1599-1618.
5. Choi, J. K., Kim, S. H., Shin, D. G., & Kang, J. G. “The Effect of Reform of New-Diagnosis Related Groups (KDRGs) on Accuracy of Payment.” Health Policy and Management 27 (No. 3 2017): 211-218.
6. Grabowski, D.C., Afendulis C.C., and T.G. McGuire. “Medicare prospective payment system and the volume and intensity of skilled nursing facility services.” Journal of Health Economics 30 (No. 4 2011): 675–684.
7. Halfon, P., Eggli, Y., Pretre-Rohrbach, I., Meylan, D., Marazzi, A., Burnard, B. “Validation of the potentially avoidable hospital readmission rate as a routine indicator of the quality of hospital care.” Medical Care 44 (No. 11 2006): 972–979.
8. Hamada, H., Sekimoto, M., and Y. Imanaka. “Effects of the pier diem prospective payment system with DRG–like grouping system (DPC/PDPS) on resource usage and healthcare quality in Japan.” Health Policy 107 (Nos. 2-3 2012): 194–201.
9. Ikegami, N. “Medical care in Japan,” New England Journal of Medicine 133 (No. 19 2005): 1295–1299.
10. Ikegami, N. “Games policy makers and providers play: introducing case-mixbased payment to hospital chronic care units in Japan,” Journal of Health Politics, Policy and Law 34 (No. 3 2009): 361–380.
11. Im, J. “Hwanjajungsim gachigibanui jaewonilsu gwallibangan (Patientcenterd Value-based Measures for Management of Length of Stay).” Health Insurance Review & Assessment Policy Brief 13 (No. 4 2019): 45-51. (in Korean)
12. Im, J., Park, G., Jung, E., Lee, J. “Jaewonilsu jeokjeongseong pyeonggabangan maryeon (Development of Evaluation Measure on Appropriateness of Length of Stay).” Health Insurance Review and Assessment Service, Ministry of Health and Welfare, 2018. (in Korean)
13. Jang, S. I., Nam, C. M., Lee, S. G., Kim, T. H., Park, S., & Park, E. C. “Impact of payment system change from per-case to per-diem on high severity patient’s length of stay.” Medicine 95 (No. 37 2016).
14. Ju, Y. J., Park, E. C., Shin, J., Lee, S. A., Choi, Y., & Lee, H. Y. “Association between re-admission rate and hospital characteristics for ischemic heart disease.” Current Medical Research and Opinion 34 (No. 3 2018): 441-446.
15. Kang, G. “Urinara jillyobijibulbosangjedoui gaehyeok: sinpogwalsugaje doibui uiuiwa juyo nonjaengjeom (Reform of Health Care Reimbursement System in Korea: The Signif icance of Introduction of Korean Case Payment System and Major Issues).” Korean Academy of Health Policy and Management Conference Proceedings 2010 (No. 2 2010): 21-37. (in Korean)
16. Kondo, A., Kawabuchi, K. “Evaluation of the introduction of a diagnosis procedure combination system for patient outcome and hospitalisation charges for patients with hip fracture or lung cancer in Japan.” Health Policy 107 (Nos. 2-3 2012): 184–193.
17. Kuwabara, K., Matsuda, S., Fushimi, K., Ishikawa, K.B., Horiguchi, H., Hayashida, K. and K.Fujimori. “Contribution of case–mix classification to profiling hospital characteristics and productivity.” International Journal of Health Planning and Management 26 (No. 3 2011): e138–e150.
18. Lopes AA, Leavey SF, McCullough K, Gillespie B, Bommer J, Canaud BJ, Saito A, Fukuhara S, Held PJ, Port FK, Young EW. “Early readmission and length of hospitalization practices in the dialysis outcomes and practice patterns study (DOPPS).” Hemodialisys International 8 (No. 3 2004): 287–294.
19. Ma, C. “Cost and quality incentives in health care: a reply.” Journal of Economics and Management Strategy 7 (1998): 139–142.
20. Matsuda, S., K.B. Ishikawa, K. Kuwabara, K. Fujimori, K. Fushimi, and H. Hashimoto “Development and use of the Japanese case–mix system.” Eurohealth 14 (No. 3 2008): 25–30.
21. Mayes, R. “The origins, development, and passage of Medicare’s revolutionary prospective payment system.” Journal of the History of Medicine and Allied Sciences 62 (No. 1 2007): 21–55.
22. Ministry of Finance. Heisei 24 nendo ippan kaikei saishutsu yosan (Plan for annual expenditure from the general accounts 2012), 2012. (in Japanese) (
23. Ministry of Health, Labor, and Welfare. Shindangunbunrui–nikansuru kokusaikaigi (International conference on DPCs), An outline, 2004. (in Japanese)
24. Ministry of Health, Labor, and Welfare. Heisei 16 nendo DPC dounyu–no eikyou hyouka–nikansuru chousa–oyobi hyouka–nitsuite (On the 2004 survey about the effect of the introduction of DPCs), 2005. (in Japanese)
25. Ministry of Health, Labor, and Welfare. Heisei 21 nendo DPC donyuno eikyo hyoukanikakawaru chousa. Chosa jisshi setsumei shiryo (Explanatory materials on implementing the 2008 survey on the Effect of DPC introduction), 2009. (in Japanese)
26. Ministry of Health, Labor, and Welfare. Chiiki iryou shien byouin ichiran (A list of local hospitals, designated for support), 2012a. (in Japanese) (–att/2r98520000025awe.pdf)
27. Ministry of Health, Labor, and Welfare. Heisei 24 nendo shinryouhoushuu kaitei–niokeru DPC(PDPS)–no taiou–nitsuite (On DPC(PDPS) rates in the 2012 revision of the unified fee schedule), 2012b. (in Japanese) (–att/2r98520000025zn7.pdf)
28. Ministry of Health, Labor, and Welfare. Heisei 24 nenpan kouseiroudouhakusho siryouhen (White paper on health, labor, and welfare for 2012, supplementary material), 2012c. (in Japanese) (
29. Ministry of Health, Labor, and Welfare. DPC taishoubyouin junbibyouin-no genkyou-nitsuite (On the situation with DPC hospitals and DPC-preparatory hospitals), 2013. (in Japanese) (
30. Ministry of Health, Labor, and Welfare. Review result about correspondence of DPC system (DPC/ PDPS) for 2016 revision (interim report). Subcommittee on DPC Evaluation, MHLW, 2015. (in Japanese). (
31. Nawata, K., & Kawabuchi, K. “Evaluation of the DPC-based inclusive payment system in Japan for cataract operations by a new model.” Mathematics and Computers in Simulation 93 (2013): 76-85.
32. Nawata, K., Nitta, A., Watanabe, S., & Kawabuchi, K. “An analysis of the length of stay and effectiveness of treatment for hip fracture patients in Japan: Evaluation of the 2002 revision of the medical service fee schedule.” Journal of Health Economics 25(No. 4 2006): 722-739.
33. OECD. Health at a Glance 2011: OECD Indicators, OECD Publishing, 2011.
34. OECD. Health at a Glance 2015: OECD Indicators, OECD Publishing, 2015.
35. OECD. Health at a Glance 2019: OECD Indicators, OECD Publishing, 2019.
36. Okamura, S., Kobayashi, R., and T.Sakamaki. “Case–mix payment in Japanese medical care.” Health Policy 74 (No. 3 2005): 282–286.
37. Okuyama, T. “An action of the DPC Support Tool project team in hospital of Sagamihara.” Journal of Japan Hospital Association 4 (2008): 18–23. (in Japanese)
38. Sato, M. “DPC dounyu-niokeru shinryou jouhou kanri (Medical data management due to introduction of DPCs).” Journal of Japan Hospital Association 6 (2007): 52–71. (in Japanese)
39. Shin, H., Yeo, N., Lee, C., Kang, G., Oh, S., and Lee, J. “Sinpogwaljibuljedo sibeomsaeop pyeongga yeongu (Evaluation of Korean Case Payment System Pilot Program).” Health Insurance Review and Assessment Service, Ministry of Health and Welfare, 2020. (in Korean).
40. Takaku, R., & Yamaoka, A. “Payment systems and hospital length of stay: a bunching-based evidence.” International journal of health economics and management 19 (No. 1 2019): 53-77.
41. Tchoe, B. “Diagnosis-related group-based payment system and its reform plan in Korea.” Jpn J Health Econ Policy 21 (No. 1 2010): 213-26.
42. Tchoe, B. “Gungmingeongangboheomui jaejeongwigi woninbunseokgwa pyeongga (Evaluation on the Financial Crisis of National Health Insurance).” Korean Social Security Studies 18 (No. 1 2002): 37-66. (in Korean)
43. Weissman, J. S., Ayanian, J. Z., Chasan-Taber, S., Sherwood, M. J., Roth, C., & Epstein, A. M. “Hospital readmissions and quality of care.” Medical care (1999): 490-501.
44. Yang, B., & Park, Y. “Technology investment by hospitals in Korea.” Seoul Journal of Economics 4 (No. 4 1991): 293-310.
45. Yasunaga, H., H. Ide, T. Imamura, and K. Ohe. “Impacts of the Japanese diagnosis procedure combination based payment system on cardiovascular medicine–related costs.” International Heart Journal 46 (No. 5 2005): 855–866.
46. Yasunaga, H., H. Ide, T. Imamura, and K. Ohe. “Influence of Japan’s new diagnosis procedure combination–based payment system on the surgical sector: does it really shorten the hospital stay?” Surgery Today 36 (No. 7 2006): 577–585.