Does Treatment Respond to Reimbursement Rates? Evidence from Trauma Care

Some models of provider behavior predict that physicians, like other experts, may respond dysfunctionally to financial incentives by recommending unnecessary treatment. We empirically test this relationship using data from inpatient hospitalizations surrounding a 2003 Colorado auto insurance reform. The reform shifted a large fraction of auto injury patients from coverage through auto insurers to less generous sources of reimbursement, such as health insurance and self-pay. Despite negligible changes in auto injury characteristics during this period, treatment supply increased following the reform. Procedure use rose by 5-10% and billed charges rose by 5%, and these increases are specific to auto but not other types of traumatic injury. These changes appear to reflect an increase in real resources devoted to treatment, but do not improve mortality outcomes. Our findings are consistent with models of physician-induced demand. JEL Classification: I11, G22, K13