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Provider Payment Reform in China: Evidence from the Diagnosis Related Group (DRG) Implementation


This paper investigates the impact of China’s reform of the system for medical payments from traditional fee-for-service to prospective payment in the form of diagnosis-related group. The paper explores comprehensive aspects of the reform, taking advantage of a large-scale administrative data set from a pilot city in China. It finds that total reimbursable medical expenditure per admission dropped by 7.6 percent, with greater impact on patients who spent a larger amount. To better understand the changes, further decompositions find that the reduction in total reimbursable expenditure is fully explained by reduction in the quantity of services instead of using cheaper ones, and by reduction in the use of drugs but not reduction in other types of services, including examination, treatment, and nursing care. In addition, no evidence is found on quality deterioration or behavioral responses, including upcoding and cream skimming. Hospitals maintained their revenue through attracting more patients to contend with cost containment induced by the payment reform