Hospital responses to price shocks under the prospective payment system

Abstract

Under the prospective payment system (PPS), hospitals receive a bundled payment for an entire episode of treatment based on diagnosis‐related groups (DRG). Although there is ample evidence regarding the impact of the introduction of the PPS, there is little research on the effects of the ensuing changes in payment levels under the PPS. In 2005, the Medicare PPS changed its definition of payment areas from the Metropolitan Statistical Areas to the Core‐Based Statistical Areas, generating substantial area‐specific price shocks. Using these exogenous price variations, this study examines hospital responses to price changes under the PPS. The results demonstrate that, while the average payment amount significantly increases in the affected areas, no parallel trend is observed in admission volume, treatment intensity, and quality of services. Conversely, hospitals facing a price increase are more liable to the perverse incentives that the PPS is known to encourage, namely, selecting or shifting patients into higher‐paying DRGs. These results suggest that paying a higher price for a given service may not induce hospitals to offer services of better quality, but can rather prompt even higher payments through other behavioral responses.

Do financial incentives matter? Effects of Medicare price shocks on skilled nursing facility care

“…Although we do not find a significant relationship between payment and admissions, this positive relationship between payment rates and days is consistent with the standard predictions for profit‐maximizing firm behavior and the empirical findings by Clemens and Gottlieb (). Our findings also suggest that SNF admissions are not responsive to payment changes; this is consistent with Shin (), which reports that similar changes in Medicare payments had no effect on Medicare acute care hospital admissions. Notably, we do not find support for demand inducement in our main specification.…”

“…It is possible that decreases in Medicare rates could increase admissions for cases with relatively high profit margins. Likewise, we are not able to observe upcoding, which was identified in Shin () as a hospital response to the geographic realignment of the HWI and which has been examined in prior work on SNF behavior (Bowblis & Brunt, ). Future studies could employ patient‐level data to explore these questions.…”

“…McHenry and Mellor () and He, McHenry, and Mellor () study nurse wages and SNF staffing, respectively. Because the HWI change also affected the hospital inpatient PPS, Shin () studies its impact on hospital volume and finds no effects on Medicare hospital admissions or LOS. However, effects of the HWI change in the hospital setting may be obscured by various policies.…”

Trends in Bronchiolitis Hospitalizations in the United States: 2000–2016

“…4,33 Additionally, we also observed the increase in cost in children without complex chronic conditions or mechanical ventilation use, suggesting that the observed increase in the nationwide cost for bronchiolitis is also attributable to the well-documented role of physician and hospital service fees in the increasing cost. 36 Furthermore, the literature has continued to report inconsistencies between clinicians as to the best bronchiolitis management, which is demonstrated by the wide variability in diagnosis and care in this population. [5][6][7] This mechanism might also have attributed, at least partially, to the observed increases in health care use and hospital cost.…”

The Hidden Pandemic: the Cost of Postoperative Complications

“…It is logical this will enhance a focus on costly elements of perioperative and surgical care delivery and especially mechanisms to reduce costly complications discussed previously. There is a risk such mechanisms encourage undesirable responses such as upcoding to maximise provider returns [ 87 , 88 ••], case selection (“cream skimming”), collusion, skimping, or laying off costs to others [ 89 , 90 ]. Concerns around skimping are often voiced by clinicians.…”