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How Do Hospitals Respond to Price Changes?

Listed author(s):
  • Leemore S. Dafny
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    This paper investigates whether hospitals respond in profit-maximizing ways to changes in diagnosis-specific prices determined by Medicare's Prospective Payment System and other public and private insurers. Previous studies have been unable to isolate this response because changes in reimbursement amounts (prices) are typically endogenous: they are adjusted to reflect changes in hospital costs. I exploit an exogenous 1988 policy change that generated large price changes for 43 percent of all Medicare admissions. I find that hospitals responded to these price changes by upcoding' patients to diagnosis codes associated with large reimbursement increases, garnering $330-$425 million in extra reimbursement annually. This response was particularly strong among for-profit hospitals. With the important exception of elective diagnoses, I find little evidence that hospitals increased the intensity of care in diagnoses subject to price increases, where intensity is measured by total costs, length of stay, number of surgical procedures, and number of intensive-care-unit days. Neither did hospitals increase the volume of patients admitted to more remunerative diagnoses, notwithstanding the strong a priori expectation that such a response should prevail in fixed-price settings. Taken together, these findings suggest that, for the most part, hospitals do not alter their treatment or admissions policies based on diagnosis-specific prices; however they employ sophisticated coding strategies in order to maximize total reimbursement. The results also suggest that models of quality competition among hospitals may be inappropriate at the level of specific diagnoses ( products').

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    Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9972.

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    Date of creation: Sep 2003
    Publication status: published as Dafny, Leemore S. "How Do Hospitals Respond to Price Changes?" American Economic Review 95, 5 (December 2005): 1525-1547.
    Handle: RePEc:nbr:nberwo:9972
    Note: AG HC
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    1. Jeremy I. Bulow & John Geanakoplos & Paul D. Klemperer, 1983. "Multimarket Oligopoly," Cowles Foundation Discussion Papers 674, Cowles Foundation for Research in Economics, Yale University.
    2. 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.
    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. Cutler, David M, 1995. "The Incidence of Adverse Medical Outcomes under Prospective Payment," Econometrica, Econometric Society, vol. 63(1), pages 29-50, January.
    5. 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.
    6. Mark G. Duggan, 2000. "Hospital Ownership and Public Medical Spending," The Quarterly Journal of Economics, Oxford University Press, vol. 115(4), pages 1343-1373.
    7. David M. Cutler & Jill R. Horwitz, 1998. "Converting Hospitals from Not-for-profit to For-profit Status," NBER Working Papers 6672, National Bureau of Economic Research, Inc.
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