Introduction of Performance- and Day-based Lump-sum Remuneration for Stationary Psychiatric and Psychosomatic Treatments in Germany - Analysis of Incentives of the PEPP System

Abstract

Purpose: This paper surveys the effects of day-based lump-sum remuneration as defined by the PEPP system on the patients' length of stay and compares its incentives to the mechanisms of the German DRG system and the former remuneration system for stationary psychiatric and psychosomatic treatments. Methods: The analysis identifies the economically optimal length of stay defined as the profit maximising duration of treatment by comparing marginal revenues and marginal costs. Since it is economically optimal to extend the treatment until the marginal costs exceed the marginal revenues, psychiatric and psychosomatic facilities are incentivised to minimise the time gap between average duration of treatment as expected duration of treatment and the economically optimal length of stay. Results: Compared to the German DRG system, which provides a strong incentive to reduce length of stay, the incentives set by the PEPP system imply either a reduction or an extension of treatment duration depending on the underlying cost function. If a degressive cost function is assumed, which is typical for treatments of psychiatric and psychosomatic illnesses, the economically optimal duration of treatment will be at the last upper boundary of the interval of the marginal revenue function in which the average marginal revenues exceed the average marginal costs. It is also feasible that it is economically optimal to treat the patient for as long as possible. The hospital is incentivised to extend or reduce the time of treatment to this point in time. Conclusions: Psychiatric and psychosomatic hospitals are able to increase their profits by reducing or extending time of treatment. Therefore these facilities have to justify the extent of treatment to the health insurance companies. Since the incentives of the PEPP system and the DRG system diverge, the results of research on supply induced demand in the DRG system cannot be transferred to the discussion about the effects of the introduction of the PEPP system. As long as the average duration of treatment as expected duration of treatment deviates from the economically optimal length of stay, policy makers should consider the options of adaptations, i.e., increase of time intervals or calculating cost weights based on variable costs combined with separate remuneration of fixed costs. The TEPP system and PEPPplus are already being discussed as adaptions or additions.