Upcoding and heterogeneity in hospitals’ response: A Natural Experiment

How has this administrative change affcted the healthcare providers behaviour? Using a unique longitudinal database with 145 million stays, I study the dependence of the severity classification associated with hospital stays on a financial incentive, as well as the resulting budgetary reallocations. The classification of diagnosis-related groups (DRGs) in France changed in 2009. The number of groups was multiplied by 4. Controlling for pathology indicators and hospital fixed e↵ects, I unambiguously demonstrate that a finer classification led to an "upcoding" of stays. Because of a fixed annual budget at the national level, these results directly imply that the upcoding led to a budget reallocation which increased the share of health spending that went to for-profit hospitals, at the expense of public nonresearch hospitals. This budget reallocation did not correspond to any change in the actual production of care.