A recent paper** at AEA highlights the role of financial incentives in clinical decision making.
Medicare’s prospective payment system for long-term acute-care hospitals (LTCHs) provides modest reimbursements at the beginning of a patient’s stay before jumping discontinuously to a large lump-sum payment after a prespecified number of days. We show that LTCHs respond to the financial incentives of this system by disproportionately discharging patients after they cross the large-payment threshold. We find this occurs more often at for-profit facilities, facilities acquired by leading LTCH chains, and facilities colocated with other hospitals….
the average LTCH keeps patients about a week longer than they would if reimbursements were not tied to their lengths of stay.
To translate this out of academic economicese, Medicare pays long term acute care hospitals a little bit at the start of a course of treatment. After a while, there is a huge lump sum payment that is supposed to cover the entire bundle of services is triggered if a patient is still in the LTCH. A patient who is in the LTCH the day before the trigger date has only been a source of costs and low revenue for the LTCH. A patient who is in the LTCH the day after the lump sum trigger is a source of costs and big revenue for the LTCH. A patient who is in the LTCH for six months after the trigger date is a money losing patient.
LTCH hospitals want to push as many patients as they credibly can to the trigger date that releases a whole lot of revenue. Once revenue is triggered, the incentive is then to get the patients out the door as quickly as possible to minimize new costs.
If we were to assume that LTCH are run without profit motive and with pure altruism, we would expect to see a discharge pattern that does not spike immediately after the revenue release day. If we were to assume that economic incentives matter, we could expect at least some patient stays to be stretched to the trigger point.
This study sees the second story. LTCH hospitals respond to clear economic incentives.
Any payment structure that has controllable attributes that lead to a significant change in revenue or costs will see gaming. People, including doctors, respond to financial incentives. The response may vary between individuals and industries, but step functions create strong incentives where the decision to keep someone an extra day or two or to hurry up their discharge by the same day or two will occur.
As we move towards even more complex payment structures, we need to think through the incentives that the payment system creates. And then we need to look at the trade-offs and decide whether or not those trade-offs are good for the patient and society or if they are merely means of extracting rent.
Eliason, Paul J., Paul L. E. Grieco, Ryan C. McDevitt, and James W. Roberts. 2018. “Strategic Patient Discharge: The Case of Long-Term Care Hospitals.” American Economic Review, 108 (11): 3232-65. DOI: 10.1257/aer.20170092