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How Do Hospitals Respond to Price Changes?

  • Leemore S. Dafny
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    This paper examines hospital responses to changes in diagnosis-specific prices by exploiting a 1988 policy reform that generated large price changes for 43 percent of Medicare admissions. I find hospitals responded primarily by "upcoding" patients to diagnosis codes with the largest price increases. This response was particularly strong among for-profit hospitals. I find little evidence hospitals increased the volume of admissions differentially for diagnoses subject to the largest price increases, despite the financial incentive to do so. Neither did they increase intensity or quality of care in these diagnoses, suggesting hospitals do not compete for patients at the diagnosis level.

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    File URL: http://www.aeaweb.org/articles.php?doi=10.1257/000282805775014236
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    File URL: http://www.aeaweb.org/aer/data/dec05_data_20031197.zip
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    Article provided by American Economic Association in its journal American Economic Review.

    Volume (Year): 95 (2005)
    Issue (Month): 5 (December)
    Pages: 1525-1547

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    Handle: RePEc:aea:aecrev:v:95:y:2005:i:5:p:1525-1547
    Note: DOI: 10.1257/000282805775014236
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    1. Cutler, D.M., 1992. "The Incidence of Adverse Medical Outcome Under Prospective Payment," Harvard Institute of Economic Research Working Papers 1603, Harvard - Institute of Economic Research.
    2. Dranove, David, 1988. "Pricing by non-profit institutions : The case of hospital cost-shifting," Journal of Health Economics, Elsevier, vol. 7(1), pages 47-57, March.
    3. David M. Cutler, 1998. "Cost Shifting or Cost Cutting? The Incidence of Reductions in Medicare Payments," NBER Chapters, in: Tax Policy and the Economy, Volume 12, pages 1-28 National Bureau of Economic Research, Inc.
    4. Mark Duggan, 2002. "Hospital Market Structure and the Behavior of Not-For-Profit Hospitals," RAND Journal of Economics, The RAND Corporation, vol. 33(3), pages 433-446, Autumn.
    5. Randall P. Ellis & Thomas G. McGuire, 1994. "Hospital Response to Prospective Payment: Moral Hazard, Selection, and Practice-Style Effects," Papers 0050, Boston University - Industry Studies Programme.
    6. David Dranove, 1987. "Rate-Setting by Diagnosis Related Groups and Hospital Specialization," RAND Journal of Economics, The RAND Corporation, vol. 18(3), pages 417-427, Autumn.
    7. Dafny, Leemore & Gruber, Jonathan, 2005. "Public insurance and child hospitalizations: access and efficiency effects," Journal of Public Economics, Elsevier, vol. 89(1), pages 109-129, January.
    8. Mark G. Duggan, 2000. "Hospital Ownership And Public Medical Spending," The Quarterly Journal of Economics, MIT Press, vol. 115(4), pages 1343-1373, November.
    9. Boyd H. Gilman, 2000. "Hospital response to DRG refinements: the impact of multiple reimbursement incentives on inpatient length of stay," Health Economics, John Wiley & Sons, Ltd., vol. 9(4), pages 277-294.
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