Do Hospitals Cross Subsidize?
Cross-subsidies are often considered the principal mechanism through which hospitals provide unprofitable care. Yet, hospitals' reliance on and extent of cross-subsidization are difficult to establish. We exploit entry by cardiac specialty hospitals as an exogenous shock to incumbent hospitals' profitability and in turn to their ability to cross-subsidize unprofitable services. Using patient-level data from general short-term hospitals in Arizona and Colorado before and after entry, we find that the hospitals most exposed to entry reduced their provision of services considered to be unprofitable (psychiatric, substance- abuse, and trauma care) and expanded their admissions for neurosurgery, a highly profitable service.
We wish to thank Cory Capps, Liran Einav and Mark Pauly for their comments and suggestions. We acknowledge funding by Agency for Healthcare Research and Quality (2RO1 HS010730); National Institute of Mental Health (R01 MH0745151) and The Center for Health Management Research (CHMR). The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.
David, Guy & Lindrooth, Richard C. & Helmchen, Lorens A. & Burns, Lawton R., 2014. "Do hospitals cross-subsidize?," Journal of Health Economics, Elsevier, vol. 37(C), pages 198-218. citation courtesy of