Academic journal article AEI Paper & Studies

Financial Incentives, Hospital Care, and Health Outcomes: Evidence from Fair Pricing Laws

Academic journal article AEI Paper & Studies

Financial Incentives, Hospital Care, and Health Outcomes: Evidence from Fair Pricing Laws

Article excerpt

Working Paper November 2015

It is often assumed that financial incentives of healthcare providers affect the care they deliver, but this issue is surprisingly difficult to study. The recent enactment of state laws that limit how much hospitals can charge uninsured patients provide a unique opportunity. Using an event study framework and panel data from the Nationwide Inpatient Sample, we examine whether these regulations lead to reductions in the amount and quality of care given to uninsured patients. We find that the introduction of a fair pricing law leads to a seven to nine percent reduction in the average length of hospital stay for uninsured patients, with no corresponding change for insured patients. These care reductions are not accompanied by worsening quality of inpatient care. Overall, our results provide strong evidence that hospitals actively alter their behavior in response to financial incentives, and are consistent with the laws promoting a shift towards more efficient care delivery. The findings also add to the growing evidence that hospitals can, and do, treat patients differently based upon insurance status.

1 Introduction

It is widely believed that the way health care providers are paid affects the care they deliver. Given that most patients have limited ability to determine what care they need, or even the quality of care they have received, understanding this relationship is vital to both patients and policy makers. Unfortunately, opportunities to study this issue are relatively rare. Much of the existing literature relies on comparisons of fundamentally different groups - insured and uninsured patients (Levy and Meltzer, 2008), or combines insurance's effect on payments to providers with the financial protections it affords patients (Finkelstein et al., 2012; Card et al., 2009, 2008; Manning et al., 1987). This paper takes advantage of an exogenous change in financial incentives created in the late 2000s by state fair pricing laws (FPLs) that limit payments hospitals can collect from uninsured patients.

After a hospital visit, every patient receives a bill showing three different prices for each service: the official list price, the amount paid by the insurer (if applicable), and the amount they are being asked to pay. The difference between the list price and the insurance payment represents the discount negotiated by the insurer. As recently as the late 1970s, hospitals typically collected the full list price for the services delivered. However, in the years since list prices have increased substantially, and now bear little relationship to either hospital expenses or payments made on behalf of insured patients (Tompkins et al., 2006). As depicted in Figure 1, while hospital spending has increased rapidly (9% annually), it has been far exceeded by growth in charges (12.4% annually).

While insured patients benefit from their insurers negotiating steep discounts, the uninsured are typically billed at full list price. (1) Unsurprisingly, these billing practices have been characterized as inequitable. A number of states have responded by enacting "fair pricing" laws (FPLs) that prevent hospitals from collecting more from uninsured patients than they would from a public or large private insurer. Thus, FPLs create competing incentives for care delivery by reducing both the price to the consumer and the payment to the provider. This allows us to determine whether overall changes in care are dominated by either patient or provider responses to the changing financial incentives.

We use data from the Nationwide Inpatient Sample in an event study framework to show that price caps imposed through fair pricing regulations substantially decrease the amount of inpatient care that hospitals deliver to uninsured patients. The introduction of a fair pricing law leads to a seven to nine percent reduction in the length of stay for uninsured patients, and a similar percentage reduction in billed charges per stay. …

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