Unintended effect of reduced patient cost sharing: evidence from China

In China, hospitals are classified into three tiers based on size and quality to triage patients. Among them, tier-2 and tier-3 hospitals provide similar inpatient services, while tier-3s have higher patient cost sharing due to their ability to provide more sophisticated care. In this study, we exploit a plausibly exogenous change in the financial environment facing tier-2 hospitals: reduced cost sharing in tier-3s. We find that patients are diverted from tier-2s after the reform, and in response to income loss, tier-2s increase the surgical probability and total expense per admission. A 1% decrease in the number of admissions increases the surgical probability by 0.25%, which suggests supplier-induced demand. We also find that tier-2 hospitals induce greater demand from patients with less urgent conditions and more elective procedures. Our analysis suggests that benevolent cost sharing reduction may have unintended consequences beyond the targeted group, and policymakers who neglect these effects would underestimate the costs of such reforms.