Threshold-based Medicare Incentives and Aggressive Patient Reporting in U.S. Hospitals

ABSTRACT: This paper examines regulatory reporting by large urban hospitals in response to financial incentives designed to increase the provision of health care services to certain underserved individuals. We find strong evidence that hospitals have used aggressive reporting to extract substantial unwarranted funding from Medicare's Disproportionate Share Hospital (DSH) program—a program designed to ease the burden on hospitals treating low income populations. Our evidence suggests that the accuracy of basic performance metrics (in this case, the number of low income patients served) can be unreliable when threshold-driven incentives based on such metrics benefit the reporting party (in this case, large urban hospitals). Similarities between the DSH program and current payment reforms, along with policy implications, are discussed. JEL Classifications: H51; I18.