How Do Hospitals Respond to Payment Incentives?

Given the accelerating rise in U.S. public health care expenditures, Medicare has launched various pilot reimbursement models to reform health care delivery by holding health care providers financially accountable. Under Medicare’s currently dominant payment method, fee-for-service (FFS), each health care provider involved in an episode of care is reimbursed for services provided to a patient. This volume-based payment model incentivizes profit-maximizing health care providers to overuse healthcare resources regardless of the necessity or quality of care. In addition, the inefficient FFS system creates a fragmented health care delivery system, where health care providers have no incentive to coordinate during an episode of treating a health condition. The growing need for alternative reimbursement models is more recognized for certain health conditions including total joint replacement (TJR). There are numerous entities involved in TJR, which are not coordinated under the current fee-for-service payment method.

This paper investigates the impact of the Bundled Payments for Care Improvement Model 2 (BPCI Model 2) initiative, one of the most recent and comprehensive alternative payment methods, on reducing health care cost, and reforming the coordination and quality of the care delivered to total joint replacement patients. In BPCI Model 2, participating hospitals are financially accountable for Medicare spending on hospitalization, post-acute care and all related services, including readmission, up to 90 days after hospital discharge.

By using hospital discharge-level data from State Inpatient Databases, developed by Agency for Healthcare Research and Quality, I investigate the mechanism used by financially accountable hospitals to reduce health care utilization and aggregate expenditures over a cycle of treating TJR. I estimate a difference-in-difference model where I compare inpatient length of stay, number of procedures, hospital total charges, and disposition pattern of TJR patients of BPCI-participating hospitals to outcomes of non-participating ones before and after the bundled payment was implemented. In order to study the impact of BPCI Model 2 on the quality of care, I estimate the effect of this payment reform on probability of re-hospitalization within 30 or 90 days after hospital discharge. Moreover, I stratify the sample by payer type to investigate the broader effect of BPCI Model 2 and whether participating hospitals discriminate against TJR patients with other insurance types.

My empirical analyses suggest despite a significant 15 percentage point decrease in probability of discharging patients to institutional post-acute care facilities, and one third of day reduction in hospital length of stay, the quality of care is improved and there is a significant decrease in probability of re-hospitalization. I find no cost-shifting effect on non-Medicare patients or any significant evidence that BPCI-participating hospitals use different practice patterns among TJR patients across payer types. In addition, I find no supporting evidence that the orthopedic surgeons performing surgery in BPCI-participating hospitals sort healthier patients to those entities and divert more intensive patients to non-participating ones. The results suggest BPCI Model 2 leads to less post-acute care utilization and higher quality.

JEL Classification— H5, I1, L1

Keywords— Medicare, Bundled Payment, Health Care