Health Care Management Science

, Volume 15, Issue 1, pp 48–62 | Cite as

On the effect of prospective payment on local hospital competition in Germany

  • Helmut Herwartz
  • Christoph StrumannEmail author


The introduction of prospective hospital reimbursement based on diagnosis related groups (DRG) in 2004 has been a conspicuous attempt to increase hospital efficiency in the German health sector. As a consequence of the reform a rise of competition for (low cost) patients could be expected. In this paper the competition between hospitals, quantified as spatial spillover estimates of hospital efficiency, is analyzed for periods before and after the reform. We implement a two-stage efficiency model that allows for spatial interdependence among hospitals. Hospital efficiency is determined by means of non-parametric and parametric econometric frontier models. We diagnose a significant increase of negative spatial spillovers characterizing hospital performance in Germany, and thus, confirm the expected rise of competition.


Hospital efficiency Stochastic frontier analysis Data envelopment analysis Spatial analysis Diagnosis related groups 

JEL Classification

C21 D61 I11 I18 



We thank three anonymous referees, Uwe Jensen, Andrew Street, the participants of the XVth. Spring meeting of young economists 2010 in Luxembourg, Jahrestagung des Vereins für Socialpolitik 2010 in Kiel and 15. Nachwuchsworkshop der DStatG 2009 in Merseburg for helpful comments and discussions on earlier versions of this manuscript. We also thank Alexander Vogel and Hendrik Tietje of the Forschungsdatenzentrum der Statistischen Landesämter—Standort Kiel/Hamburg for their cooperation.


  1. 1.
    Anselin L (1988) Spatial econometrics: methods and models. Kluwer Academic Publishers, BostonGoogle Scholar
  2. 2.
    Augurzky B, Engel D, Schwierz C (2006) Who gets the credit? Determinants of the probability of default in the German hospital sector. RWI discussion papers 0054, Rheinisch-Westfälisches Institut für WirtschaftsforschungGoogle Scholar
  3. 3.
    Banker RD, Morey RC (1986) Efficiency analysis for exogenously fixed inputs and outputs. Oper Res 34(4):513–521CrossRefGoogle Scholar
  4. 4.
    Banker RD, Charnes A, Cooper WW (1984) Some models for estimating technical and scale inefficiencies in data envelopment analysis. Manage Sci 30:1078–1092CrossRefGoogle Scholar
  5. 5.
    Banker RD, Gadh VM, Gorr WL (1993) A Monte Carlo comparison of two production frontier estimation methods: corrected ordinary least squares and data envelopment analysis. Eur J Oper Res 67(3):332–343CrossRefGoogle Scholar
  6. 6.
    Barbetta GP, Turati G, Zago AM (2007) Behavioral differences between public and private not-for-profit hospitals in the Italian national health service. Health Econ 16(1):75–96CrossRefGoogle Scholar
  7. 7.
    Biorn E, Hagen TP, Iversen T, Magnussen J (2003) The effect of activity-based financing on hospital efficiency: a panel data analysis of DEA efficiency scores 1992–2000. Health Care Manage Sci 6(4):271–283CrossRefGoogle Scholar
  8. 8.
    Böcking W, Ahrens U, Kirch W, Milakovic M (2005) First results of the introduction of DRGs in Germany and overview of experience from other DRG countries. J Public Health 13(3):128–137CrossRefGoogle Scholar
  9. 9.
    Chang H (1998) Determinants of hospital efficiency: the case of central government-owned Hospitals in Taiwan. Omega 26(2):307–317CrossRefGoogle Scholar
  10. 10.
    Chirikos TN, Sear AM (2000) Measuring hospital efficiency: a comparison of two approaches. Health Serv Res 34(6):1389–1408Google Scholar
  11. 11.
    Dranove D, Ludwick R (1999) Competition and pricing by nonprofit hospitals: a reassessment of Lynk’s analysis. J Health Econ 18(1):87–98CrossRefGoogle Scholar
  12. 12.
    Ellis RP (1998) Creaming, skimping and dumping: provider competition on the intensive and extensive margins. J Health Econ 17(5):537–555CrossRefGoogle Scholar
  13. 13.
    Ellis RP, McGuire TG (2002) Hospital response to prospective payment: moral hazard, selection, and practice-style effects. J Health Econ 15(3):257–277CrossRefGoogle Scholar
  14. 14.
    Evans RG, Walker HD (1972) Information theory and the analysis of hospital cost structure. Can J Econ 5(3):398–418CrossRefGoogle Scholar
  15. 15.
    Farsi M, Filippini M (2008) Effects of ownership, subsidization and teaching activities on hospital costs in Switzerland. Health Econ 17(3):335–350CrossRefGoogle Scholar
  16. 16.
    Giuffrida A, Gravelle H (2001) Measuring performances in primary care: econometric analysis and DEA. Appl Econ 33:163–175Google Scholar
  17. 17.
    Greer I, Schulten T, Böhlke N (2010) Deutsche Gründlichkeit: liberalization and local industrial relations in German hospitals. CERIC working paper no. 9Google Scholar
  18. 18.
    Helmig B, Lapsley I (2001) On the efficiency of public, welfare and private hospitals in Germany over time—a sectoral DEA-study. Health Serv Manag Res 14(4):263–274CrossRefGoogle Scholar
  19. 19.
    Hensen P, Beissert S, Bruckner-Tuderman L, Luger TA, Roeder N, Müller ML (2008) Introduction of diagnosis-related groups in Germany: evaluation of impact on in-patient care in a dermatological setting. Eur J Public Health 18(1):85–91CrossRefGoogle Scholar
  20. 20.
    Herr (2008) Cost and technical efficiency of German hospitals: does ownership matter? Health Econ 17(9):1057–1071CrossRefGoogle Scholar
  21. 21.
    Herr A, Schmitz H, Augurzky B (2011) Profit efficiency and ownership of German hospitals. Health Econ 20(6):660–674CrossRefGoogle Scholar
  22. 22.
    Hollingsworth B (2008) The measurement of efficiency and productivity of health care delivery. Health Econ 17(10):1107–1128CrossRefGoogle Scholar
  23. 23.
    Jacobs R (2001) Alternative methods to examine hospital efficiency: data envelopment analysis and stochastic frontier analysis. Health Care Manage Sci 4(2):103–115CrossRefGoogle Scholar
  24. 24.
    Jacobs R, Smith PC, Street A (2006) Measuring efficiency in health care: analytic techniques and health policy. Cambridge University Press, CambridgeCrossRefGoogle Scholar
  25. 25.
    Johnson AL, McGinnis LF (2008) Outlier detection in two-stage semiparametric DEA models. Eur J Oper Res 187(2):629–635CrossRefGoogle Scholar
  26. 26.
    Jondrow J, Lovell CAK, Materov I, Schmidt P (1982) On the estimation of technical inefficiency in the stochastic frontier production function model. J Econom 19(2–3):233–238CrossRefGoogle Scholar
  27. 27.
    Kim M, Schmidt P (2008) Valid tests of whether technical inefficiency depends on firm characteristics. J Econom 144(2):409–427CrossRefGoogle Scholar
  28. 28.
    Krieger N, Williams DR, Moss NE (1997) Measuring social class in US public health research: concepts, methodologies, and guidelines. Annu Rev Public Health 18:341–378CrossRefGoogle Scholar
  29. 29.
    Kumbhakar SC, Lovell CAK (2000) Stochastic frontier analysis. Cambridge, Cambridge University PressGoogle Scholar
  30. 30.
    Kumbhakar SC, Ghosh S, McGuckin JT (1991) A generalized production frontier approach for estimating determinants of inefficiency in US dairy farms. J Bus Econ Stat 9(3):279–286CrossRefGoogle Scholar
  31. 31.
    Lee K, Chun K, Lee J (2008) Reforming the hospital service structure to improve efficiency: urban hospital specialization. Health Policy 87(1):41–49CrossRefGoogle Scholar
  32. 32.
    Lungen M, Lapsley I (2003) The reform of hospital financing in Germany: an international solution? J Health Organ Manag 17(5):360–372CrossRefGoogle Scholar
  33. 33.
    Mielck A (2000) Soziale Ungleichheit und Gesundheit: Einführung in die aktuelle Diskussion. Bern u.a., Hans HuberGoogle Scholar
  34. 34.
    Mielck A (2005) Soziale Ungleichheit und Gesundheit: Empirische Ergebnisse, Erklärungsansätze, Interventionsmöglichkeiten. Bern u.a., Hans HuberGoogle Scholar
  35. 35.
    Mörsch M (2010) Bestandsaufnahme zur Krankenhausplanung und Investitionsfinanzierung in den Bundeslandern. Deutsche Krankenhausgesellschaft. Dezernat II, BerlinGoogle Scholar
  36. 36.
    Norton EC, Van Houtven CH, Lindrooth RC, Normand S-LT, Dickey B (2002) Does prospective payment reduce inpatient length of stay? Health Econ 11(5):377–387CrossRefGoogle Scholar
  37. 37.
    Perelman J, Shmueli A, Closon M-C (2008) Deriving a risk-adjustment formula for hospital financing: integrating the impact of socio-economic status on length of stay. Soc Sci Med 66:88–98CrossRefGoogle Scholar
  38. 38.
    Picone G, Wilson RM, Chou S-Y (2003) Analysis of hospital length of stay and discharge destination using hazard functions with unmeasured heterogeneity. Health Econ 12(12):1021–1034CrossRefGoogle Scholar
  39. 39.
    Propper C, Burgess S, Green K (2004) Does competition between hospitals improve the quality of care? Hospital death rates and the NHS internal market. J Public Econ 11(7–8):1247–1272CrossRefGoogle Scholar
  40. 40.
    Rosko MD, Chillingerian JA (1999) Estimating hospital inefficiency: does case mix matter? Health Care Manage Sci 23(1):57–71Google Scholar
  41. 41.
    Schreyögg J, Stargardt T, Tiemann O (2011) Costs and quality of hospitals in different health care systems: a multi-level approach with propensity score matching. Health Econ 20(1):85–100CrossRefGoogle Scholar
  42. 42.
    Simar L, Wilson PW (2007) Estimation and inference in two-stage, semi-parametric models of production processes. J Econom 136(1):31–64CrossRefGoogle Scholar
  43. 43.
    Staat M (2006) Efficiency of hospitals in Germany: a DEA-bootstrap approach. Appl Econ 38(19):2255–2263CrossRefGoogle Scholar
  44. 44.
    Statistisches Bundesamt (2008) Krankenhaus- Landschaft im Umbruch. Begleitmaterial zur Pressekonferenz am 10. Dezember 2008 in BerlinGoogle Scholar
  45. 45.
    Steinmann L, Dittrich G, Karmann A, Zweifel P (2004) Measuring and comparing the (in)efficiency of German and Swiss hospitals. Eur J Health Econ 5(3):216–226CrossRefGoogle Scholar
  46. 46.
    Tiemann O, Schreyögg J (2009) Effects of ownership on hospital efficiency in Germany. BuR Bus Res J 2(2):115–145Google Scholar
  47. 47.
    Town R, Vistnes G (2001) Hospital competition in HMO networks. J Health Econ 20(5):733–753CrossRefGoogle Scholar
  48. 48.
    Van Biesebroeck J (2007) Robustness of productivity estimates. J Ind Econ 55(3):529–569CrossRefGoogle Scholar
  49. 49.
    Wang H, Schmidt P (2002) One-step and two-step estimation of the effects of exogenous variables on technical efficiency levels. Journal of Productivity Analysis 18(2):129–144CrossRefGoogle Scholar
  50. 50.
    Webster TM, Baumgartner R, Sprunger JK, Baldwin DD, McDougall EM, Herrell SD (2005) A clinical pathway for laparoscopic pyeloplasty decreases length of stay. J Urol 173(6):2081–2084CrossRefGoogle Scholar
  51. 51.
    Werblow A, Karmann A, Robra BP (2010) Effizienz, Wettbewerb und regionale Unterschiede in der stationären Versorgung. In: Klauber J, Geraedts M, Friedrich J (eds) Krankenhaus-Report 2010—Schwerpunkt: Krankenhausversorgung in der Krise? Stuttgart, Schattauer, pp 41–71Google Scholar
  52. 52.
    Werblow A, Robra BP (2007) Einsparpotenziale im medizinfernen Bereich deutscher Krankenhäuser—eine regionale Effizienzfront-Analyse. In: Klauber J, Schellschmidt H, Robra BP (eds) Krankenhaus-Report 2006—Schwerpunkt: Krankenhausmarkt im Umbruch. Stuttgart, Schattauer, pp 133–151Google Scholar
  53. 53.
    Wilson PW (1995) Detecting influential observations in data envelopment analysis. Journal of Productivity Analysis 6(1):27–45CrossRefGoogle Scholar
  54. 54.
    Zweifel P, Breyer F, Kifmann M (2009) Health economics. Springer, BerlinCrossRefGoogle Scholar

Copyright information

© Springer Science+Business Media, LLC 2011

Authors and Affiliations

  1. 1.Institut für Statistik und ÖkonometrieChristian-Albrechts-Universität zu KielKielGermany

Personalised recommendations