No abstract

Facing steadily rising health care costs, Switzerland introduced a system of diagnosis‐related groups (DRGs) for hospital payment in 2012 (SwissDRG) along with cost‐efficiency benchmarking between hospitals. On the one hand, SwissDRG puts hospitals at financial risk and strengthens incentives for efficiency by setting a fixed price per case. On the other hand, hospitals are incentivized to game the system and exploit adverse incentives. We investigate hospitals' behavioral response to financial incentives in Swiss neonatology. First, we provide strong evidence for manipulations of reported birth weight among low‐birth‐weight newborns. Using a difference‐in‐difference‐in‐difference design, we find that 14–27% of birth weights are manipulated around specific birth weight cutoffs. Second, we find evidence of an upward‐sloping supply curve of cheating, indicating that hospitals increasingly engage in fraudulent behavior as financial incentives increase. Our estimates indicate a supply‐sided price elasticity of cheating between 0.16 and 0.52.