Prospective funding of general hospitals in Norway--incentives for higher production?

In Norway, a new system of Activity Based Financing (ABF) for general hospitals was introduced on a comprehensive basis in July 1997. The main purpose of the reform was to increase activity so that more patients could receive treatment more quickly without reducing the quality of care. In this paper we analyse whether the reform has had any significant effect using two different performance indicators: number of patients treated and production of DRG points (Diagnosis Related Group). We divide the hospitals into two groups: hospitals owned by counties that have adopted the ABF system, and hospitals owned by counties using other funding systems. The first group then becomes the experiment group, while the second serves as a comparison group. It is argued that fixed-effect models are suitable specifications for this evaluation study, handling selection bias and the influence of unobservable explanatory variables in a consistent manner. We find that the reform has had a significant effect on the number of patients treated and DRG points produced. The results are sensitive as to how the experiment and the comparison group are determined.