Provider Incentives and Healthcare Costs: Evidence from Long-Term Care Hospitals

76 Pages Posted: 27 Jan 2018 Last revised: 13 Jul 2018

See all articles by Liran Einav

Liran Einav

Stanford University - Department of Economics; National Bureau of Economic Research (NBER)

Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER)

Neale Mahoney

University of Chicago Booth School of Business; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: June 30, 2018

Abstract

We study the design of provider incentives in the post-acute care setting - a high-stakes but under-studied segment of the healthcare system. We focus on long-term care hospitals (LTCHs) and the large (approximately $13,500) jump in Medicare payments they receive when a patient's stay reaches a threshold number of days. Discharges increase substantially after the threshold, with the marginal discharged patient in relatively better health. Despite the large financial incentives and behavioral response in a high mortality population, we are unable to detect any compelling evidence of an impact on patient mortality. To assess provider behavior under counterfactual payment schedules, we estimate a simple dynamic discrete choice model of LTCH discharge decisions. When we conservatively limit ourselves to alternative contracts that hold the LTCH harmless, we find that an alternative contract can generate Medicare savings of about $2,100 per admission, or about 5% of total payments. More aggressive payment reforms can generate substantially greater savings, but the accompanying reduction in LTCH profits has potential out-of-sample consequences. Our results highlight how improved financial incentives may be able to reduce healthcare spending, without negative consequences for industry profits or patient health.

Keywords: Healthcare, Post-Acute Care, Financial Incentives, Nonlinear Contracts

JEL Classification: D22, I11, L21

Suggested Citation

Einav, Liran and Finkelstein, Amy and Mahoney, Neale, Provider Incentives and Healthcare Costs: Evidence from Long-Term Care Hospitals (June 30, 2018). Becker Friedman Institute for Research in Economics Working Paper No. 2018-3. Available at SSRN: https://ssrn.com/abstract=3110133 or http://dx.doi.org/10.2139/ssrn.3110133

Liran Einav

Stanford University - Department of Economics ( email )

Landau Economics Building
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Amy Finkelstein

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Neale Mahoney (Contact Author)

University of Chicago Booth School of Business ( email )

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Chicago, IL 60637
United States
773.702.9278 (Phone)

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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