HOSPITAL BEHAVIOR UNDER MEDICARE INCENTIVES

The 1983 amendments to Social Security changed the reporting mechanism through which hospitals are reimbursed for treating Medicare patients . The revised system changed the incentive structure for hospitals. Th is study which refines and extends Soderstrom (1990a) examines reporti ng behavior following institution of the new system. Under the reimbur sement system, hospitals receive a fixed fee based upon the patient's diagnosis. Hospitals have several strategies to increase profit under this system. Two strategies are examined here: 1) changing admission p olicy and 2) changing reporting policy. Empirical results provide limi ted evidence that hospitals in poor financial condition and/or with hi gher marginal costs have more admission and reporting errors than hosp itals in good financial condition and/or with lower marginal costs.