Effect of the structure of hospital payment on length of stay

In response to rapidly rising costs, payers for health care services have made a number of changes in the way they reimburse hospitals for care. In this article we study the effect of different payment methods on the length of stay of Medicaid patients. We examine supply response by type of patient (medical, surgical, and psychiatric) and hospital ownership. We find that per case payment systems and negotiated contracts lead to significant decreases in the length of stay for all groups. Prospective per diem with limits in most cases leads to decreases in the length of stay. In general, we find that the supply response is stronger for psychiatric patients than for medical and surgical patients, and that publicly owned hospitals are more responsive to payment system incentives than are nonpublic hospitals.