Strong selection incentives exist in many institutionally-mixed
industries. We examine such an industry, hospices, where there
are strong financial incentives, due to the Medicare pricing system,
to maximize patients’ expected lengths of stay. We examine
the responses of for-profit and nonprofit organizations to these
incentives, using a unique data set consisting of all urban Medicare
admissions at for-profit and religious nonprofit hospices in 1993.
The hospice industry is ideal for testing whether the response
to selection incentives differs by ownership. First, provider
selection of patients would be based on expected length of stay,
which can be estimated using observable patient characteristics.
Second, curative care is not reimbursed, and so the length of
stay is unlikely to be affected by endogenous provider behavior
subsequent to admission. Third, competition is local, and most
markets have both for-profit and nonprofit hospices—which
us to take advantage of variation within the market for identification.
Fourth, price is exogenous and marginal costs are largely homogenous
within a given disease category.
We find that, as expected, for-profit hospices are
more responsive to the incentive to attract longer-stay patients.
For-profits have significantly longer average lengths of patient
stay: They are significantly less likely to admit patients with
short expected lengths of stay, and they admit patients sooner
after hospital discharge. We posit that the mechanism through
which these results occur involves limiting the provision of services
that would be attractive to patients with diagnoses associated
with short life expectancies. In addition, selective marketing
of the hospice will likely lead to early admissions and disproportionate
admissions of patients with longer life expectancies. Finally,
we show the behavior in the industry is consistent with a model
of nonprofit organization behavior in which nonprofits maximize
profit on profitable patients to subsidize care of unprofitable
patients and thus, to satisfy their mission.
Burton A. Weisbrod, John Evans
Professor of Economics; Faculty Fellow, Institute for Policy Research,
Northwestern University Richard Lindrooth, Professor of Health Administration
and Policy, Medical University of South Carolina
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