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Regulatory Exploitation and the Market for Corporate Controls

  • Leemore Dafny
  • David Dranove

This paper investigates whether managers who fail to exploit regulatory loopholes are vulnerable to replacement. We use the U.S. hospital industry in 1985-1996 as a case study. A 1988 change in Medicare rules widened a pre-existing loophole in the Medicare payment system, presenting hospitals with an opportunity to increase operating margins by five or more percentage points simply by "upcoding" patients to more lucrative codes. We find that "room to upcode" is a statistically and economically significant predictor of whether a hospital replaces its management with a new team of for-profit managers. We also find that hospitals replacing their management subsequently upcode more than a sample of similar hospitals that did not, as identified by propensity scores.

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File URL: http://www.nber.org/papers/w12438.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 12438.

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Date of creation: Aug 2006
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Publication status: published as Leemore Dafny & David Dranove, 2009. "Regulatory Exploitation and Management Changes: Upcoding in the Hospital Industry," Journal of Law & Economics, University of Chicago Press, vol. 52(2), pages 223-250, 05.
Handle: RePEc:nbr:nberwo:12438
Note: CF HC
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  1. Glaeser, Edward Ludwig & Laibson, David I. & Scheinkman, Jose A. & Soutter, Christine L., 2000. "Measuring Trust," Scholarly Articles 4481497, Harvard University Department of Economics.
  2. 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.
  3. Brian J. Hall & Jeffrey B. Liebman, 2000. "The Taxation of Executive Compensation," NBER Chapters, in: Tax Policy and the Economy, Volume 14, pages 1-44 National Bureau of Economic Research, Inc.
  4. Brickley, James A & Van Horn, R Lawrence, 2002. "Managerial Incentives in Nonprofit Organizations: Evidence from Hospitals," Journal of Law and Economics, University of Chicago Press, vol. 45(1), pages 227-49, April.
  5. Mark Duggan & Fiona Scott Morton, 2004. "The Distortionary Effects of Government Procurement: Evidence from Medicaid Prescription Drug Purchasing," NBER Working Papers 10930, National Bureau of Economic Research, Inc.
  6. Silverman, Elaine & Skinner, Jonathan, 2004. "Medicare upcoding and hospital ownership," Journal of Health Economics, Elsevier, vol. 23(2), pages 369-389, March.
  7. Sascha O. Becker & Andrea Ichino, 2002. "Estimation of average treatment effects based on propensity scores," Stata Journal, StataCorp LP, vol. 2(4), pages 358-377, November.
  8. Ching-to Albert Ma & Thomas G. McGuire, 1995. "Optimal Health Insurance and Provider Payment," Papers 0059, Boston University - Industry Studies Programme.
  9. Dranove, David & Lindrooth, Richard, 2003. "Hospital consolidation and costs: another look at the evidence," Journal of Health Economics, Elsevier, vol. 22(6), pages 983-997, November.
  10. Roomkin, Myron J & Weisbrod, Burton A, 1999. "Managerial Compensation and Incentives in For-Profit and Nonprofit Hospitals," Journal of Law, Economics and Organization, Oxford University Press, vol. 15(3), pages 750-81, October.
  11. Leemore S. Dafny, 2005. "How Do Hospitals Respond to Price Changes?," American Economic Review, American Economic Association, vol. 95(5), pages 1525-1547, December.
  12. Desai, Mihir A. & Hines, James R. Jr., 2002. "Expectations and Expatriations: Tracing the Causes and Consequences of Corporate Inversions," National Tax Journal, National Tax Association, vol. 55(3), pages 409-40, September.
  13. Austan Goolsbee, 1997. "What Happens When You Tax the Rich? Evidence from Executive Compensation," NBER Working Papers 6333, National Bureau of Economic Research, Inc.
  14. Margaret K. Kyle, 2007. "Pharmaceutical Price Controls and Entry Strategies," The Review of Economics and Statistics, MIT Press, vol. 89(1), pages 88-99, February.
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