How Do Hospitals Respond to Payment Incentives?

59 Pages Posted: 18 Nov 2019 Last revised: 15 Apr 2022

See all articles by Gautam Gowrisankaran

Gautam Gowrisankaran

Columbia University; HEC Montreal; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

Keith A. Joiner

University of Arizona - College of Medicine

Jianjing Lin

Rensselaer Polytechnic Institute (RPI)

Date Written: November 2019

Abstract

A literature has found that medical providers inflate bills and report more conditions given financial incentives. We evaluate whether Medicare reimbursement incentives are driven more by bill inflation or coding costs. Medicare reformed its payment mechanism for inpatient hospitalizations in 2007, increasing coding costs. We first examine whether increased extra reimbursements from reporting more diagnoses lead hospitals to report more high bill codes. We find that increases in reimbursements within narrow patient groups led to more high bill codes before 2007 but not after. Using the payment reform, we then test for costly coding by comparing hospitals that adopted electronic medical records (EMRs) to others. Adopters reported relatively more top bill codes from secondary diagnoses after the reform, exclusively for medical patients, with a negative effect for surgical patients. This is consistent with EMRs lowering coding costs for medical discharges but increasing them for surgical ones. We further use a 2008 policy where Medicare implemented financial penalties for certain hospital-acquired conditions. EMR hospitals coded relatively more of these conditions following the penalization, lowering revenues. Together, this evidence is contrary to bill inflation but consistent with costly coding. Reducing coding costs may increase inpatient Medicare costs by $1.04 billion annually.

Suggested Citation

Gowrisankaran, Gautam and Joiner, Keith A. and Lin, Jianjing, How Do Hospitals Respond to Payment Incentives? (November 2019). NBER Working Paper No. w26455, Available at SSRN: https://ssrn.com/abstract=3488955

Gautam Gowrisankaran (Contact Author)

Columbia University ( email )

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New York, NY 10027
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HEC Montreal ( email )

3000, Chemin de la Côte-Sainte-Catherine
Montreal, Quebec H2X 2L3
Canada

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Keith A. Joiner

University of Arizona - College of Medicine ( email )

Department of History
Tucson, AZ 85721
United States

Jianjing Lin

Rensselaer Polytechnic Institute (RPI) ( email )

Troy, NY 12180
United States

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