The Interactive Effect of Medicare Inpatient and Outpatient Reimbursement

Hospital care is characterized by inpatient and outpatient departments; however, Medicare reimburses hospitals differently for treatment in each department. In this paper, I examine how hospitals respond to Medicare’s disjointed payment system. I exploit the conversion of rural hospitals to Medicare’s Critical Access Hospital (CAH) program, which implemented a universal payment system. Although the new structure increased marginal reimbursements, hospitals responded by decreasing treatment intensity. I propose that this decline is explained by high initial levels of outpatient procedures, used to offset losses from inpatient care, and the elimination of inpatient losses through the CAH program, removing the need to maintain high outpatient procedure volumes. Additionally, the decline in treatment is not associated with reductions in health outcomes. My findings suggest Medicare’s disjointed payment system created an interactive effect across departments where the financial status of one department impacted behavior in the other. In general, these results highlight the importance of designing and analyzing government programs in a unified approach in order to account for interactions across policies. ∗Brown University, Department of Economics. E-mail: andrew [email protected]. Special thanks to my advisors, Emily Oster, Anna Aizer, and Brian Knight for their insight and dedication; and for their helpful comments I would like to thank Joseph Kofi Acquah, Desislava Byanova, Kenneth Chay, Alex Eble, Morgan Frost, Bruno Gasperini, Philipp Ketz, Kanghyock Koh, Michelle Marcus, and seminar participants at Brown University. All remaining errors are my own.