Financial incentives in Norwegian somatic hospitals - An early look at how hospitals respond to the profit incentive in Norway

Abstract

Background: The cost brought about by healthcare systems in western society is high and likely to increase in the future. Governments with activity-based funding (ABF) systems attempt to increase efficiency by introducing financial incentives, using internal market mechanisms for hospitals under the umbrella of new public management. The prospective payment system in Norway nudges hospitals into becoming quantity-adjusting market participants, by adding self-adjusting prices to diagnostic groups based on national averages. Hospitals then compete for financial surplus and thus the ability to fund future investments. Problem: The Norwegian government has utilized activity-based funding (ABF) for over 20 years and the effect of the profit incentive innate to the system is still not fully understood. This means that hospital decision-makers may be using illegitimate strategies to increase profitability. New data that allows analysis of profit incentives at the diagnosis-related group (DRG) level became available in 2017, and no analysis of financial incentives including this cost information has yet to be published. Method: An iterative approach to achieve a parsimonious crossed multilevel model design to isolate the effect of profit from other financial incentives for somatic hospitals in Norway. This was done using the R-package lme4. The data included price, cost, and quantity data from 18 hospitals between 2018 and 2021. Results: The results show that there is a small association between the average profit of a DRG and number of admissions. With a semi-elasticity for the population effect of 3.21% for admissions per 1 unit increase in average DRG profit. Conclusion: This thesis shows how analyzing profit in a divided funding healthcare system is possible given a few assumptions of the mechanisms in the funding systems. The results indicate that there is an association between the profit incentive and admissions of a DRG. The model should be considered robust to the deviations in model assumptions of residual normality and variance. Future research including either more years of analysis or a different model is still needed to confirm the effect of profit and the impact of including patient characteristics in the analysis.

Keywords: ISF, DRG, KPP, Norwegian somatic hospitals, Profit incentive.