Effectiveness of hospital transfer payments under a prospective payment system: An analysis of a policy change in New Zealand

Prospective payment systems reimburse hospitals based on diagnosis‐specific flat fees, which are generally based on average costs. While this encourages cost‐consciousness on the part of hospitals, it introduces undesirable incentives for patient transfers. Hospitals might feel encouraged to transfer patients if the expected treatment costs exceed the diagnosis‐related flat fee. A transfer fee would discourage such behavior and, therefore, could be welfare enhancing. In 2003, New Zealand introduced a fee to cover situations of patient transfers between hospitals. We investigate the effects of this fee by analyzing 4,020,796 healthcare events from 2000 to 2007 and find a significant reduction in overall transfers after the policy change. Looking at transfer types, we observe a relative reduction in transfers to non‐specialist hospitals but a relative increase in transfers to specialist facilities. It suggests that the policy change created a focusing effect that encourages public health care providers to transfer patients only when necessary to specialized providers and retain those patients they can treat. We also find no evidence that the transfer fee harmed the quality of care, measured by mortality, readmission and length of stay. The broader policy recommendation of this research is the introduction or reassessment of transfer payments to improve funding efficiency.