Introduction

In this paper, we examine features of the production of health care in contexts where inputs care is provided by multiple organizations that coordinate care horizontally (hospitals and surgeons) and vertically (hospitals and surgeons upstream from post-acute care providers). These complex inter-firm relationships are commonplace but there is relatively little empirical evidence on how these relationships might change when incentives change. We exploit a large-scale mandatory experiment conducted by the Center for Medicare and Medicaid Innovation (CMMI) at the Centers for Medicare and Medicare Services (CMS) in the market for Lower Extremity Joint Replacement (LEJR) surgeries to understand whether, how and when the production function of care, or practice style, for these and related surgeries changes in response to changes in financial incentives. Our focus is on practice-style changes implemented by the hospital vis-a-vis the discharge status of patients post-surgery at the hospital-surgeon nexus with the hospital playing a pivotal role. Implementation of such changes requires coordination between hospital management and staff, surgeons who provide services in those hospitals, and post-acute care providers such as Skilled Nursing Facilities (SNF), Inpatient Rehabilitation Hospitals (IRF), and Home Healthcare Agencies (HHA). The extent of practice-style changes in response to changes in incentives would likely depend on several market factors. We examine three such factors. First, the relative supply of these types of downstream post-acute care providers would affect the extent to which hospital discharge directives to patients might change. Second, we expect the relative importance of LEJR surgeries in the hospital’s product port-folio to affect the extent of changes. Finally, because there is considerable inertia in practice styles, hospitals that were more aligned toward the changes incentivized by the experiment would be more likely to change.

Using a difference-in-difference design, we first describe the effects of the Comprehensive Joint Replacement (CJR) “Model” conducted by CMMI on discharge destinations and patient costs among Medicare patients, privately-insured patients and Medicare and privately insured patients receiving other (not LEJR) surgeries for diseases and disorders of the musculoskeletal system and connective tissue (MDC 8). This analysis complements and supports results reported in Finkelstein et al. (2018)[^1], Levin Group (2018, 2019, 2020) [^4] [^5] [^6], Einav et al. (2022)[^2], Chen et al. (2022)[^3]. Mentioned in the background section, the CJR model has a phased-in approach where the downside risk will only be introduced in 2017, the second year of the implementation. The results of event study using a extended difference-in-difference design echos the design and shows that hospitals respond to the punishment more significant in 2017 comparing to 2016.

Progress Log

[^1] Amy Finkelstein, Yunan Ji, Neale Mahoney, and Jonathan Skinner. Mandatory medicare bundled payment program for lower extremity joint replacement and discharge to institutional postacute care interim analysis of the first year of a 5-year randomized trial. JAMA - Journal of the American Medical Association, 320(9):892–900, 2018. [^2] Liran Einav, Amy Finkelstein, Yunan Ji, and Neale Mahoney. Randomized trial shows healthcare payment reform has equal-sized spillover effects on patients not targeted by reform. Proceedings of the National Academy of Sciences, 117(32):18939–18947, 2020. [^3] Alice J Chen, Michael R Richards, Christopher M Whaley, and Xiaoxi Zhao. The extent of externalities from medicare payment policy. American Journal of Health Economics, 8(2):000–000, 2022 [^4] Levin Group. Cms comprehensive care for joint replacement model: Performance year 1 evaluation report, 2018. URL https://innovation.cms.gov/files/reports/cjr-firstannrpt.pdf. [^5] Levin Group. Cms comprehensive care for joint replacement model: Performance year 2 evaluation report, 2019. URL https://innovation.cms.gov/files/reports/cjr-secondannrpt.pdf. [^6] Levin Group. Cms comprehensive care for joint replacement model: Performance year 3 evaluation report, 2020. URL https://innovation.cms.gov/files/reports/cjr-thirdannrpt.pdf