Technological Diffusion Across Hospitals: The Case of a Revenue-Generating Practice

Productivity-raising technologies tend to diffuse slowly, particularly in the health care sector. To understand how incentives drive adoption, I study a technology that generates revenue for hospitals: the practice of submitting detailed documentation about patients. After a 2008 reform, hospitals were able to raise their total Medicare revenue over 2% by always specifying a patient’s type of heart failure. I find that hospitals only captured around half of this revenue, indicating that large frictions impeded takeup. The key barrier is a principal-agent problem, since doctors supply the valuable information but are not paid for it. Exploiting the fact that many doctors practice at multiple hospitals, I find that four-fifths of the dispersion in adoption reflects differences in the ability of hospitals to extract documentation from physicians. Hospital adoption is also robustly correlated with the ability to generate survival for heart attack patients and the use of inexpensive survival-raising standards of care, suggesting that principal-agent problems drive disparities in quality more generally. These findings highlight the importance of agency conflicts in explaining variations in health care performance.