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How do Hospitals Respond to Payment Incentives?

Author

Listed:
  • Gautam Gowrisankaran
  • Keith A. Joiner
  • Jianjing Lin

Abstract

A literature has found that medical providers inflate bills and report more conditions given financial incentives. We evaluate whether Medicare reimbursement incentives are driven more by bill inflation or coding costs. Medicare reformed its payment mechanism for inpatient hospitalizations in 2007, increasing coding costs. We first examine whether increased extra reimbursements from reporting more diagnoses lead hospitals to report more high bill codes. We find that increases in reimbursements within narrow patient groups led to more high bill codes before 2007 but not after. Using the payment reform, we then test for costly coding by comparing hospitals that adopted electronic medical records (EMRs) to others. Adopters reported relatively more top bill codes from secondary diagnoses after the reform, exclusively for medical patients, with a negative effect for surgical patients. This is consistent with EMRs lowering coding costs for medical discharges but increasing them for surgical ones. We further use a 2008 policy where Medicare implemented financial penalties for certain hospital-acquired conditions. EMR hospitals coded relatively more of these conditions following the penalization, lowering revenues. Together, this evidence is contrary to bill inflation but consistent with costly coding. Reducing coding costs may increase inpatient Medicare costs by $1.04 billion annually.

Suggested Citation

  • Gautam Gowrisankaran & Keith A. Joiner & Jianjing Lin, 2019. "How do Hospitals Respond to Payment Incentives?," NBER Working Papers 26455, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:26455
    Note: HC IO PE
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    More about this item

    JEL classification:

    • H51 - Public Economics - - National Government Expenditures and Related Policies - - - Government Expenditures and Health
    • I11 - Health, Education, and Welfare - - Health - - - Analysis of Health Care Markets
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • O33 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights - - - Technological Change: Choices and Consequences; Diffusion Processes

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