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. Dafny exploits an exogenous
1988 policy change that generated large price changes for 43 percent
of all Medicare admissions. She finds hospitals responded to these
price changes by “upcoding” patients to diagnosis
codes associated with large reimbursement increases, garnering
$330-$425 million in extra reimbursements annually. This response
was particularly strong among for-profit hospitals. With the important
exception of elective diagnoses, she sees 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 intensive-care-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, for the most
part, that hospitals do not alter their treatment or admissions
policies based on diagnosis-specific prices; however, they employ
sophisticated coding strategies to maximize total reimbursement.
The results also suggest models of quality competition among hospitals
might be inappropriate at the level of specific diagnoses (“products”).
Leemore Dafny, Kellogg School
of Management and Institute for Policy Research, Northwestern
University; and NBER
Click on
the working paper title at the top of this
page to download a free pdf of the paper.*
If You Need to Order a Hard Copy: Hard copies
of IPR working papers cost $5.00 each (international orders are $10 each). We only accept checks drawn on U.S. bank and payable in U.S. funds. Checks or money orders should be made
payable to Northwestern University and sent to the following address:
Publications Department - WP Orders
Institute for Policy Research
2040 Sheridan Rd., Evanston, IL 60208-4100.
For information, call 847-491-8712 or email ipr@northwestern.edu.
Please note that we do not accept credit cards.
*Adobe Acrobat Reader 5.0 (or higher) is needed to read the Acrobat pdf.
If you need to install Acrobat Reader, click the button below. Once the file
has downloaded onto your desktop, run it to install the reader on your hard
drive.
