Length of hospital stays and financial incentives: evidence from Dutch rehabilitation centers

Non-linear reimbursement contracts in healthcare have been increasingly used to quantify providers' responses to financial incentives. In the present research, we utilize a large one-off increase in the reimbursement of rehabilitation care to assess to what extent providers are willing to modify their treating behavior to maximize profits. In order to disincentivize the use of short inpatient stays for rehabilitation care, Dutch policy-makers have instated a two-part stepwise tariff-schedule. A lower tariff-schedule is applied for short hospital stays (≤ 14 days), while a higher tariff-schedule is utilized for longer treatments. Switching from one schedule to the other at day 15 of inpatient care leads to a sudden and large increase in tariffs. We show that, for most care-types, patients are seldom treated in an inpatient setting for less than 15 days, while the majority of patients are discharged after the threshold. Therefore, we conclude that the financial incentive at day 15 leads to considerable distortions in treatment. However, instead of discharging all patients at the threshold point where marginal tariffs are maximized, providers tend to continue treatment indicating altruistic behavior. As healthcare payment systems move away from piecewise reimbursement (e.g., fee-for-service arrangements), and services are increasingly 'lumped' together into e.g., DRGs and bundled payments, the likelihood of such discontinuities in tariff-schedules radically increases. Our research illustrates how such discontinuities in reimbursements can lead to distortions in the amount of healthcare provided contributing to the debate on optimal healthcare contracting design.