Nber Working Paper Series the Effect of Soft Budget Constraints on Access and Quality in Hospital Care

Given an increasingly complex web of financial pressures on providers, studies have examined how the hospitals' overall financial health affect different aspects of hospital operation. In our study, we analyze this issue focusing on hospital access and quality by introducing an important aspect of the financial incentives, soft budget constraints (SBC), that takes into account both hospital's current and past financial health as well as their expected financial outlook (i.e., whether there is a sponsoring organization to bail them out). We develop a conceptual framework of SBC by considering the resultant incentives on cost control and quality improvement innovations; and examine the effect of SBC on the following aspects of access and quality: safety net service survival and AMI mortality rates. We find that hospitals with softer budget constraints are less likely to shut down safety net services. In addition, hospitals with softer budget constraints appear to have better mortality outcomes, suggesting that the reduced incentive to engage in cost control innovation as the result of SBC outweighs the dampening effect of quality improvement innovation. Yu-Chu Shen Graduate School of Business and Public Policy Naval Postgraduate School 555 Dyer Road Monterey, CA 93943 and NBER [email protected] Karen Eggleston Stanford University Shorenstein Asia-Pacific Research Center Encina Hall E301 Stanford, CA 94305-6055 [email protected]