DEA-based regulation

Theory and Application to inpatient care in Saxony-Anhalt

Abstract

In this paper we present a reimbursement scheme combining yardstick competition and Data Envelopment Analysis (DEA). The scheme reimburses cost but offers a bonus for resource savings relative to a DEA-based cost norm. While this scheme minimizes informational rents, it still induces firms to minimize costs. The proposed reimbursement scheme is applied to the hospital sector in Saxony-Anhalt based on data collected in 1999. The results indicate low regulation costs compared to potentially large cost reductions due to the incentive structure of the reimbursement scheme.