Working Paper: NBER ID: w27223
Authors: Liran Einav; Amy Finkelstein; Yunan Ji; Neale Mahoney
Abstract: Government programs are often offered on an optional basis to market participants. We explore the economics of such voluntary regulation in the context of a Medicare payment reform, in which one medical provider receives a single, predetermined payment for a sequence of related healthcare services, instead of separate service-specific payments. This “bundled payment” program was originally implemented as a 5-year randomized trial, with mandatory participation by hospitals assigned to the new payment model, but after two years participation was unexpectedly made voluntary for half of these hospitals. Using detailed claim-level data, we document that voluntary participation is more likely for hospitals who can increase revenue without changing behavior (“selection on levels”) and for hospitals that had large changes in behavior when participation was mandatory (“selection on slopes”). To assess outcomes under counterfactual regimes, we estimate a simple model of responsiveness to and selection into the program. We find that the current voluntary regime generates inefficient transfers to hospitals and reduces social welfare compared to the status quo, but that alternative (feasible) designs could substantially reduce these inefficient transfers. Our analysis highlights key design elements to consider under voluntary regulation.
Keywords: Medicare; payment reform; voluntary regulation; healthcare
JEL Codes: H51; I13; I18
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Voluntary regime (F55) | Reduces overall social welfare compared to the FFS status quo (D69) |
| Better targeting of the program (H53) | Enhance social welfare by aligning participation incentives (D69) |
| Voluntary participation in the bundled payment program (I13) | Selection on levels (C52) |
| Hospitals with lower claims under the fee-for-service (FFS) system (I11) | More likely to opt into the program (D16) |
| Selection on slopes (C52) | Hospitals that experienced larger reductions in claims during the mandatory phase (I13) |
| Hospitals that experienced larger reductions in claims during the mandatory phase (I13) | More likely to remain in the program when it became voluntary (I21) |
| Bundled payments (J33) | Reduction in claims by about $400 per episode (G52) |