The effect of physicians’ financial incentives on the diagnosis related group-based prospective reimbursement scheme in Taiwan

This study examines whether the implementation of a Physician Compensation Program (PCP) improved departmental performance in a large private not-for-profit hospital’s performance after it implemented the Taiwan Diagnosis Related Group-based (Tw-DRG) prospective reimbursement scheme. Because hospitals in Taiwan are structurally similar to staffmodel HMOs, the effects of PCPs on hospital performance under the Tw-DRG scheme in Taiwan may have implications for staff-model HMOs. The data sample contains 624 monthly observations of the 26 departments in the case hospital for the period 2009–2010. Of the 26 departments, 18 have implemented the Tw-DRG scheme and are classified as the Tw-DRG group; and the other eight departments are classified as the non-Tw-DRG group. Since the introduction of the scheme, the physicians in both groups have been paid under the PCP. Overall, the results show that the case hospital’s performance deteriorated after the scheme was implemented. The findings imply that conflicts arise in hospitals where some departments have implemented the Tw-DRG scheme that encourages hospitals to reduce the utilization of medical resources, while physicians in those departments are still paid under the PCP and are, therefore, motivated to expand medical services without trying to reduce costs. As a result, the Tw-DRG scheme may fail or only have a limited effect. This study also provides evidence that physicians’ behavior affects their clinical performance, especially under a strict cost containment payment policy. Taiwan’s experience provides a good opportunity to evaluate, simultaneously, the effects of cost containment mechanisms and physicians’ incentive plans within a staff-model context.