Working Paper: NBER ID: w12254
Authors: Daron Acemoglu; Amy Finkelstein
Abstract: This paper examines the implications of regulatory change for the input mix and technology choices of regulated industries. We present a simple neoclassical framework that emphasizes the change in relative factor prices associated with the regulatory change from full cost to partial cost reimbursement, and investigate how this affects firms' technology choices through substitution of (capital embodied) technologies for tasks previously performed by labor. We examine these implications empirically by studying the change from full cost to partial cost reimbursement under the Medicare Prospective Payment System (PPS) reform, which increased the relative price of labor faced by U.S. hospitals. Using the interaction of hospitals' pre-PPS Medicare share of patient days with the introduction of these regulatory changes, we document a substantial increase in capital-labor ratios and a large decline in labor inputs associated with PPS. Most interestingly, we find that the PPS reform seems to have encouraged the adoption of a range of new medical technologies. We also show that the reform was associated with an increase in the skill composition of these hospitals, which is consistent with technology-skill or capital-skill complementarities.
Keywords: health care; regulation; technology adoption; input choices; Medicare
JEL Codes: H51; I18; L50; L51; O31; O33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| shift from full cost reimbursement (I18) | increase in capital-labor ratios (J24) |
| shift from full cost reimbursement (I18) | decline in labor inputs (J22) |
| PPS reform (H55) | increased adoption of new medical technologies (O39) |
| PPS reform (H55) | increase in skill composition of hospital staff (J24) |
| increase in capital-labor ratios (J24) | decline in labor inputs (J22) |