Voluntary Regulation: Evidence from Medicare Payment Reform

59 Pages Posted: 26 May 2020

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)

Yunan Ji

Harvard University

Neale Mahoney

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

Date Written: May 2020

Abstract

Government programs are often offered on an optional basis to market participants. We explore the economics of such voluntary regulation in the context of a Medicare payment reform, in which one medical provider receives a single, predetermined payment for a sequence of related healthcare services, instead of separate service-specific payments. This “bundled payment” program was originally implemented as a 5-year randomized trial, with mandatory participation by hospitals assigned to the new payment model, but after two years participation was unexpectedly made voluntary for half of these hospitals. Using detailed claim-level data, we document that voluntary participation is more likely for hospitals who can increase revenue without changing behavior (“selection on levels”) and for hospitals that had large changes in behavior when participation was mandatory (“selection on slopes”). To assess outcomes under counterfactual regimes, we estimate a simple model of responsiveness to and selection into the program. We find that the current voluntary regime generates inefficient transfers to hospitals and reduces social welfare compared to the status quo, but that alternative (feasible) designs could substantially reduce these inefficient transfers. Our analysis highlights key design elements to consider under voluntary regulation.

Suggested Citation

Einav, Liran and Finkelstein, Amy and Ji, Yunan and Mahoney, Neale, Voluntary Regulation: Evidence from Medicare Payment Reform (May 2020). NBER Working Paper No. w27223. Available at SSRN: https://ssrn.com/abstract=3609675

Liran Einav (Contact Author)

Stanford University - Department of Economics ( email )

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Amy Finkelstein

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

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Yunan Ji

Harvard University

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Neale Mahoney

University of Chicago Booth School of Business ( email )

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National Bureau of Economic Research (NBER) ( email )

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