How Do Hospitals Respond to Price Changes?

Abstract

This paper investigates whether hospitals respond in profit-maximizing ways to changes in diagnosis-specific prices, as determined by Medicare's Prospective Payment System and other public and private insurers. Previous studies have been unable to isolate this response because changes in reimbursement amounts (prices) are typically endogenous: they are adjusted to reflect changes in hospital costs. I exploit an exogenous 1988 policy change that generated large price changes for 43 percent of all Medicare admissions. I find that hospitals responded to these price changes by "upcoding" patients to diagnosis codes associated with large reimbursement increases, garnering $330-$425 million in extra reimbursement annually. This response was particularly strong among for-profit hospitals. With the important exception of elective diagnoses, I find little evidence that hospitals increased the intensity of care in diagnoses subject to price increases, where intensity is measured by total costs, length of stay, number of surgical procedures, and number of intensivecare-unit days. Neither did hospitals increase the volume of patients admitted to more remunerative diagnoses, notwithstanding the strong a priori expectation that such a response should prevail in fixed-price settings. Taken together, these findings suggest that, for the most part, hospitals do not alter their treatment or admissions policies based on diagnosis-specific prices; however, they employ sophisticated coding strategies in order to maximize total reimbursement. The results also suggest that models of quality competition among hospitals may be inappropriate at the level of specific diagnoses ("products").

Hospital cost shifting revisited: new evidence from the balanced budget act of 1997

“…To address the potential endogeneity between changes in Medicare and private revenues, I use an instrumental variable that is similar to that of Shen (2003) and Dafny (2005). I first simulate a Laspeyres price index given the provisions in the BBA while holding inputs at the pre-BBA level.…”

“…Second, unlike previous literature that looks for an "average" effect, this article analyzes heterogeneity in the degree of cost shifting. Using the BBA as a natural experiment, this study simulates a Medicare financial loss index conceptually similar to prior studies (Staiger and Gaumer 1992;Gruber 1994) to capture only the exogenous loss in Medicare DRG price due to the BBA, and uses it to instrument for actual change in Medicare revenue between 1996 and 2000 (Shen 2003;Dafny 2005). In addition, I test whether cost shifting depends on a hospital's bargaining power by interacting the instrumented BBA financial shocks with the importance of private payer to a hospital.…”

Discrimination in waiting times by insurance type and financial soundness of German acute care hospitals

“…See Augurzky et al [2] for a more detailed description of the data and the model. 7 The number of hospitals is higher than the number of balance sheets due to the inclusion of hospital chains. These provide only one balance sheet for all hospitals in a chain.…”

“…1 A large literature documents hospitals' responses in introducing cost-saving or reimbursementincreasing measures under PPS. These measures include decreases in the length of stay [6], selective reductions in expenditures for high-cost patients [20], upcoding 2 [7] and selection of profitable patients [8]. Owing to the regulatory framework of health insurance in Germany, the insurance status is a potential indicator for a profitable selection of patients.…”

“…On an average, the sample includes bigger hospitals, slightly overrepresents hospitals of private ownership and mirrors well the regional distribution of hospitals on the level of the German Federal States. 7 The total PD in the sample amounts to 1.31%. On average, public hospitals have a PD of 1.52%, private-not-for-profits 0.98% and private for-profits 1.47%.…”