A two paper dissertation on incentives of medicare’s disproportionate share hospital program



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PAPER 1: Medicare Cost Report (MCR preparers face incentives to inflate non-financial measurements. Consistent with research in the areas of taxpayer reporting and earnings management, I find strong evidence that MCR preparers increase Medicare reimbursement by aggressively reporting disproportionate patient percentages (DPPs), a standard hospital non-financial metric. Aggressive reporting is documented via discontinuities in empirical DPP frequencies around important payment thresholds. Most vividly, a large discontinuity in DPP reporting exists around the 15 percent threshold – the level at which hospitals extract significant payments from the Medicare Program. Discussions with industry experts suggest that the discontinuity is not the result of managing real activities; rather, the discontinuities observed appear to be a function of reporting behavior. I estimate that DPP management costs the Medicare program about $61 million per year, but more importantly, the results from this study provide timely insights in an era where post-reform Medicare payments schemes are being developed.

PAPER 2: Medicare regulations require that urban hospitals maintain at least 100 beds in order to be reimbursed according to the most generous formulas for treating low-income patients. I apply an agency theory framework to argue that this requirement creates agency costs by incentivizing hospital management to diverge from optimal bed capacities in order to extract additional revenue from the Medicare program. Findings are consistent with this prediction; however, not-for-profit hospitals appear less willing to allow capacity planning decisions to be driven by the threshold. Moreover, some evidence is provided which suggests that not-for-profit hospitals use threshold-driven capacity to expand services to the under-insured; while for-profit hospitals tend to become less efficient.