CHANGES IN-HOSPITAL SERVICE MIX AND COST ALLOCATIONS IN RESPONSE TO CHANGES IN MEDICARE REIMBURSEMENT SCHEMES

After 1983, Medicare paid hospitals for inpatient services at fixed ra tes, but continued to reimburse outpatient services based on reported cost. Using data from Washington State we find that hospitals responde d by increasing outpatient services to Medicare patients compared to n on-Medicare patients-the ratio of Medicare outpatient revenues as a pe rcentage of total Medicare revenues increased after 1983 to a signific antly greater extent than for non-Medicare patients. We also find that allocations of overhead costs to outpatient departments increased aft er 1983. These findings suggest that hospitals change their patient mi x and cost allocations to maximize hospital cash flows.