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Medicare’s Prospective Payment System: Do Differences in the Reimbursement Rate Affect Quantity of Care Delivered and Hospital Billing Practices?

By Russell Hollis

When the government changes Medicare policy, payment structures often accommodate the change through lowering reimbursement rates. Changes in reimbursements raise the question of what effect changes have on patient care. Using data sets from the Center for Medicare and Medicaid Services, I examine the diagnosis of major replacement or reattachment of the lower extremity and how the length of stay for patients responds to changing reimbursement rates. I extend my investigation of price incentives to monitor fraudulent coding by hospitals. In a sample of over 470,000 patients in 2,696 hospitals for fiscal year 2012, I find that a 1% increase in reimbursement leads to a .007% increase in length of stay for DRG 470 (without complications) patients and a .057% percent increase for DRG 469 (with complications) patients. I then find that a 10% decrease in reimbursement for DRG 470 or one percent increase for DRG 469 leads to a .0011 increase in fraction of DRG 469 patients in a particular hospital. Lastly, I comment on these results, which point to the evidence of price incentives in quantity of care an the possibility of “upcoding”1.

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Advisor: Allan Collard-Wexler | JEL Codes: H50, H51, I11, I13, I18 | Tagged: Diagnosis Related Group, Length of Stay, Medicare, Reimbursement, “Upcoding”

Questions?

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Jennifer Becker
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Michelle P. Connolly
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