Provider Incentives and Healthcare Costs: Evidence from Long-Term Care Hospitals

66 Pages Posted: 30 Jan 2017 Last revised: 6 Feb 2023

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)

Neale Mahoney

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

Multiple version iconThere are 2 versions of this paper

Date Written: January 2017

Abstract

We study the design of provider incentives in the post-acute care setting – a high-stakes but under-studied segment of the healthcare system. We focus on long-term care hospitals (LTCHs) and the large (approximately $13,000) jump in Medicare payments they receive when a patient's stay reaches a threshold number of days. The descriptive evidence indicates that discharges increase substantially after the threshold, and that the marginal patient discharged after the threshold is in relatively better health. Despite the large financial incentives and behavioral response in a high mortality population, we are unable to detect any compelling evidence of an impact on patient mortality. To assess provider behavior under counterfactual payment schedules, we estimate a simple dynamic discrete choice model of LTCH discharge decisions. When we conservatively limit ourselves to alternative contracts that hold the LTCH harmless, we find that an alternative contract can generate Medicare savings of about $2,100 per admission, or about 5% of total payments. More aggressive payment reforms can generate substantially greater savings, but the accompanying reduction in LTCH profits has potential out-of-sample consequences. Our results highlight how improved financial incentives may be able to reduce healthcare spending, without negative consequences for industry profits or patient health.

Suggested Citation

Einav, Liran and Finkelstein, Amy and Mahoney, Neale, Provider Incentives and Healthcare Costs: Evidence from Long-Term Care Hospitals (January 2017). NBER Working Paper No. w23100, Available at SSRN: https://ssrn.com/abstract=2907903

Liran Einav (Contact Author)

Stanford University - Department of Economics ( email )

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Amy Finkelstein

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Neale Mahoney

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