On the effect of prospective payment on local hospital competition in Germany

The introduction of prospective hospital reimbursement based on diagnosis related groups (DRG) in 2004 has been a conspicuous attempt to increase hospital efficiency in the German health sector. As a consequence of the reform a rise of competition for (low cost) patients could be expected. In this paper the competition between hospitals, quantified as spatial spillover estimates of hospital efficiency, is analyzed for periods before and after the reform. We implement a two-stage efficiency model that allows for spatial interdependence among hospitals. Hospital efficiency is determined by means of non-parametric and parametric econometric frontier models. We diagnose a significant increase of negative spatial spillovers characterizing hospital performance in Germany, and thus, confirm the expected rise of competition.