How do Hospitals Respond to Payment Incentives?

A recent literature finds that hospitals “upcode” when doing so increases revenues, suggesting that incomplete information creates substantial distortions. However, reporting complete information is itself costly. We examine the impact of both revenues and coding costs on hospital billing practices for Medicare inpatients. Following the literature, we investigate the fraction of patients top coded as the revenues from top coding vary. We then examine how this fraction changes following Medicare reforms—which increased the requirements and complexity to justify top codes—interacted with hospital electronic medical record adoption—which may decrease coding costs. We find evidence that coding costs drive top coding behavior.