Performance Pay in Hospitals: An Experiment on Bonus–Malus Incentives

Recent policy reforms in Germany require the introduction of a performance pay component with bonus–malus incentives in the inpatient care sector. We conduct a controlled online experiment with real hospital physicians from public hospitals and medical students in Germany, in which we investigate the effects of introducing a performance pay component with bonus–malus incentives to a simplified version of the German Diagnosis Related Groups (DRG) system using a sequential design with stylized routine cases. In both parts, participants choose between the patient optimal and profit maximizing treatment option for the same eight stylized routine cases. We find that the introduction of bonus–malus incentives only statistically significantly increases hospital physicians’ proportion of patient optimal choices for cases with high monetary baseline DRG incentives to choose the profit maximizing option. Medical students behave qualitatively similar. However, they are statistically significantly less patient oriented than real hospital physicians, and statistically significantly increase their patient optimal decisions with the introduction of bonus–malus incentives in all stylized routine cases. Overall, our results indicate that whether the introduction of a performance pay component with bonus–malus incentives to the (German) DRG system has a positive effect on the quality of care or not particularly depends on the monetary incentives implemented in the DRG system as well as the type of participants and their initial level of patient orientation.