Administered Prices and Suboptimal Prevention: Evidence from the Medicare Dialysis Program, Issue 8123
Pricing methodologies in Medicare vary from one component of the system to another, often leading to conflicting incentives. The dialysis program represents a particularly interesting case, whereby outpatient payments are much more rigid than payments for related hospital care. Failure to recognize the preventive nature of outpatient services may result in inefficient allocation of medical care and higher overall costs. To motivate the analysis, a simple extension of basic prevention and insurance theory to fit a welfare-maximizing regulator is offered. I show that while optimal inpatient payments are standard Ramsey prices, optimal outpatient payments must incorporate net loss due to unnecessary hospitalizations, as well as supply elasticities. A myopic regulator will tend to ignore this, leading to underprovision of preventive services. With constant prices, empirical analysis examines the effect of dialysis intensity on various measures of hospital use, for a local sample of patients, using count data models. Results indicate that greater dialysis intensity (measured by a state-of -the-art clinical index) indeed reduces hospital use. Moreover, this is found even at moderate or high levels of intensity, where dialysis is viewed ex ante as being adequate. A simple cost-benefit calculation suggests that for every dollar of additional spending on outpatient intensity, nearly $2 in hospital expenditures can be saved. The research confirms that the current pricing structure within aspects of the Medicare program is inefficient.
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Administered Prices Administration binary indicator capitation Cause of renal clinical coefficients composite rate curative services Diabetes dialysis intensity dialysis patients dialysis started empirical analysis End Stage Renal ESRD estimated exogeneity global payments Health Care Financing Health Economics Hemodialysis higher hospital admissions hospital resource inpatient inpatient costs inpatient services inside the back instructions inside intensity index intensity of dialysis intensity variable interaction terms levels likelihood ratio test limited dependent variables Logistic Regressions logit low intensity group Medicare Dialysis Program Medicare program Michael Woodford NBER Working Papers negative binomial model Negative Binomial Regressions Number of comorbidities number of hospital optimal price outpatient dialysis outpatient intensity overdispersion p-value papers in hard Partial Subscription payment rules preventive services pricing rule prospective payments Ravi Jagannathan reference group regulator's reimbursement relationship between outpatient Renal Dialysis renal failure risk period risk ratios sample skimping specification Stage Renal Disease suppliers Tobit Model total hospital days