NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Administered Prices and Suboptimal Prevention: Evidence from the Medicare Dialysis Program

Avi Dor

NBER Working Paper No. 8123
Issued in February 2001
NBER Program(s):   HC   HE

Pricing methodologies in Medicare vary from one component of the system to another, often leading to conflicting incentives. The dialysis program represents a particularly interesting case, whereby outpatient payments are much more rigid than payments for related hospital care. Failure to recognize the preventive nature of outpatient services may result in inefficient allocation of medical care and higher overall costs. To motivate the analysis, a simple extension of basic prevention and insurance theory to fit a welfare-maximizing regulator is offered. I show that while optimal inpatient payments are standard Ramsey prices, optimal outpatient payments must incorporate net loss due to unnecessary hospitalizations, as well as supply elasticities. A myopic regulator will tend to ignore this, leading to underprovision of preventive services. With constant prices, empirical analysis examines the effect of dialysis intensity on various measures of hospital use, for a local sample of patients, using count data models. Results indicate that greater dialysis intensity (measured by a state-of -the-art clinical index) indeed reduces hospital use. Moreover, this is found even at moderate or high levels of intensity, where dialysis is viewed ex ante as being adequate. A simple cost-benefit calculation suggests that for every dollar of additional spending on outpatient intensity, nearly $2 in hospital expenditures can be saved. The research confirms that the current pricing structure within aspects of the Medicare program is inefficient.

download in pdf format
   (506 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

This paper is available as PDF (506 K) or via email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w8123

Published: Dor, Avi. "Optimal Price Rules, Administered Prices And Suboptimal Prevention: Evidence From A Medicare Program," Journal of Regulatory Economics, 2004, v25(1,Jan), 81-104.

Users who downloaded this paper also downloaded these:
Dor, Pauly, Eichleay, and Held w13125 End-stage Renal Disease and Economic Incentives: The International Study of Health Care Organization and Financing
Frank, Kim, and Westphal Appendices to "Foreign Trade Regimes and Economic Development: South Korea"
Bhagwati Foreign Trade Regimes: Overall Conclusions
 
Publications
Activities
Meetings
NBER Videos
Data
People
About

Support
National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us