How do Hospitals Respond to Payment Incentives?

Over the past decades, Medicare has developed payment reforms that incentivize quality care, by reimbursing fixed amounts for ex ante similar patients. While these reforms may add value, they require providers to code more information on patient health conditions, which is costly. We evaluate the role of revenues and costs in coding intensity for Medicare hospitalized inpatients. We examine the role of costs by estimating hospitals’ changes in coding intensity following a 2007 reform based on whether they had adopted electronic medical records (EMRs). EMR hospitals documented relatively more top billing codes after the reform with the increase occurring only for non-surgical admissions, consistent with the hypotheses that costs became an important determinant of the coding decision and EMRs lower these costs, particularly for medical admissions. We further examine whether increased reimbursements from reporting complex diagnoses led hospitals to report more of these diagnoses. We find evidence in favor of this hypothesis before the reform but not after, suggesting that increased billing complexity post-reform made coding costs a more important driver of coding decisions. Our findings suggests that recent payment innovations might add cost to providers, who may want to consider reimbursements in their technology adoption and usage decisions.