Hospital efficiency under prospective reimbursement schemes: an empirical assessment for the case of Germany

The introduction of prospective hospital reimbursement based on diagnosis-related groups (DRG) has been a conspicuous attempt to decelerate the steady increase of hospital expenditures in the German health sector. In this work, the effect of the financial reform on hospital efficiency is subjected to empirical testing by means of two complementary testing approaches. On the one hand, we apply a two-stage procedure based on non-parametric efficiency measurement. On the other hand, a stochastic frontier model is employed that allows a one-step estimation of both production frontier parameters and inefficiency effects. To identify efficiency gains as a consequence of changes in the hospital incentive structure, we account for technological progress, spatial dependence and hospital heterogeneity. The results of both approaches do not reveal any increase in overall efficiency after the DRG reform. In contrast, a significant decline in overall hospital efficiency over time is observed.