Regulated Revenues and Hospital Behavior: Evidence from a Medicare Overhaul
We study a 2008 policy reform in which Medicare revised its hospital payment system to better reflect patients’ severity of illness. We construct a simulated instrument that predicts a hospital’s policy-induced change in reimbursement using pre-reform patients and post-reform rules. The reform led to large persistent changes in Medicare payment rates across hospitals. Hospitals that faced larger gains in Medicare reimbursement increased the volume of Medicare patients they treated. The estimates imply a volume elasticity of approximately unity. To accommodate greater volume, hospitals increased nurse employment, but also lowered length of stay, with ambiguous effects on quality.
We thank Caitlin Carroll, Josh Gottlieb, Peter Hull, workshop participants at the AEA/ASSA ASHE-con session, the ASHEcon virtual conference, Whistler Health Economics Summit, Columbia University, Princeton University, UC Berkeley and UCSB for their helpful feedback. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.