The effects of introducing prospective payments to general hospitals on length of stay, quality of care, and hospitals’ income: the early experience of Israel

A new reimbursement system for general hospitals in Israel was introduced in July 1990. The new system specified that for 15 selected procedures, hospitals would be paid by the insurers prospectively, rather than by the traditional per-diem arrangement. The rates were determined by the Ministry of Health. Henceforth, the number of selected procedures has increased and by now 40 procedures are included. In line with the ever-lasting interest in the effect of financial incentives on suppliers of medical care, the purpose of this paper is to examine the first-year effect of this change on the volume of activity, length of stay, quality of care, and hospitals’ real income. We focused on five selected procedures (cholecystectomy, hysterectomy, hip replacement, operations on lens and heart surgeries) performed in the four largest Israeli medical centers (Sheba, Sorasky, Rambam, and Hadassah). The analysis includes more than 17,000 hospitalizations occurring during two years prior to the change (July 1988–June 1990) and the first year after its implementation (July 1990–June 1991). We, therefore, examined, the short-term effects, wherein changes in the hospitals’ behavior are reflected mainly in the above-mentioned hospitalization characteristics. Further analysis will be required to examine the long-run implications of the change as well as its effect on the rest of the general inpatient sector in Israel.