Evidence of Upcoding in Pay-for-Performance Programs

Abstract

Recent Medicare legislation seeks to improve patient care quality by financially penalizing providers for hospital-acquired infections (HAIs). However, Medicare cannot directly monitor HAI rates, and instead relies on providers accurately self-reporting HAIs in claims to correctly assess penalties. Consequently, the incentives for providers to improve service quality may disappear if providers \emph{upcode}, i.e., mis-report HAIs (possibly unintentionally) in a manner that increases reimbursement or avoids financial penalties. Identifying upcoding in claims data is challenging due to unobservable confounders (e.g., patient risk). We leverage state-level variations in adverse event reporting regulations and instrumental variables to discover contradictions in HAI and present-on-admission (POA) infection reporting rates that are strongly suggestive of upcoding. We conservatively estimate that 10,000 out of 60,000 annual reimbursed claims for POA infections (18.5%) were upcoded HAIs, costing Medicare $200 million. Our findings suggest that self-reported quality metrics are unreliable and thus, recent legislation may result in unintended consequences.

Keywords: Medicare, pay-for-performance, upcoding, asymmetric information, quality control and detection, hospital-acquired infections, strategic behavior

JEL Classification: I18, I11, H51