HOSPITAL RESPONSE TO PROSPECTIVE PAYMENT - MORAL HAZARD, SELECTION, AND PRACTICE-STYLE EFFECTS

In response to a change in reimbursement incentives, hospitals may cha nge the intensity of services provided to a given set of patients, cha nge the type (or severity) of patients they see, or change their marke t share, Each of these three responses, which we define as a moral haz ard effect, a selection effect, and a practice-style effect, can influ ence average resource use in a population. We develop and implement a methodology for disentangling these effects using a panel data set of Medicaid psychiatric discharges in New Hampshire. We also find evidenc e for the form of quality competition hypothesized by Dranove (1987).