Colorado Medicaid Hospital Rate Change:The Importance of the Broader Multi-Provider, Multi-Payer Environment

In July 2011 Colorado Medicaid decreased its hospital reimbursement for uncomplicated cesarean deliveries to the same level as its payments for complicated vaginal deliveries to discourage medically unnecessary cesarean deliveries and reduce expenditures. This study seeks to understand why that fee change had such a modest impact on Medicaid cesarean rates. Our approach is novel in that we investigate the fee change in a broader context that includes the hospital-physician relationship. We find the fee change has a statistically significant, but modest, effect, on the rate of cesarean delivery. However, hospital ownership type and the presence of salaried employee physicians, also appear to have statistically significant and substantive effects on cesarean rates. We conclude that, if rate changes are to achieve their desired effects, policy makers must take into account network relationships and how incentives work within those relationships.