How Do Hospitals Respond to Price Changes?
Author InfoLeemore S. Dafny Abstract This paper investigates whether hospitals respond in profit-maximizing ways to changes in diagnosis-specific prices determined by Medicare’s Prospective Payment System and other public and private insurers. Previous studies have been unable to isolate this response because changes in reimbursement amounts (prices) are typically endogenous: they are adjusted to reflect changes in hospital costs. I exploit an exogenous 1988 policy change that generated large price changes for 43 percent of all Medicare admissions. I find that hospitals responded to these price changes by upcoding’ patients to diagnosis codes associated with large reimbursement increases, garnering $330-$425 million in extra reimbursement annually. This response was particularly strong among for-profit hospitals. With the important exception of elective diagnoses, I find little evidence that hospitals increased the intensity of care in diagnoses subject to price increases, where intens
