New Evidence on Hospital Profitability by Payer Group and the Effects of Payer Generosity

Published in: International Journal of Health Care Finance and Economics, v. 4, no. 3, Sep. 2004, p. 231-246

Posted on RAND.org on December 31, 2003

by Bernard Friedman, Neeraj Sood, Kelly Engstrom, Diane McKenzie

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This study provides (a) new estimates of U.S. hospital profitability by payer group, controlling for hospital characteristics, and (b) evidence about the intensity of care for particular diseases associated with the generosity of the patient's payer and other payers at the same hospital. The conceptual framework is a variant of the well-known model of a local monopolist selling in a segmented market. Effects of two kinds of regulation are considered. The data are taken from hospital accounting reports in four states in FY2000, and detailed discharge summaries from the Healthcare Cost and Utilization Project of the Agency for Healthcare Research and Quality. The profitability of inpatient care for privately insured patients was found to be about 4% less than for Medicare, but 14% higher than for Medicaid and only 9% higher than for self-pay patients. The authors found significant direct associations but not external effects of payer generosity on the intensity of care.

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