Medicare Hospital Classifications and the Effect on Bed Capacity Decisions in U.S. Hospitals

Abstract

I examine whether or not capacity planning decisions are influenced by a 100-bed threshold used by U.S. Medicare to classify hospitals as “large” or “small” for payment purposes. I also examine the role of the institutional environment in directing hospital actions in this setting. In summary, I find that the 100-bed threshold drives a significant discontinuity in the distribution of U.S. urban hospital bed capacities. I find that the magnitude of the discontinuity is greatest in hospitals that are highly incentivized to be classified as large, and I demonstrate that not-for-profit and government hospitals are more likely than for-profit hospitals to decrease bed capacities and lose large hospital classifications. I argue from an institutional perspective that Medicare’s threshold-based classification practices act as institutional pressures for hospitals to take on similar structures in terms of bed capacity, but that not-for-profit and government hospitals attach less importance to the increased revenues and profits associated with meeting the threshold. As a result, not-for-profit and government hospitals are more likely to challenge the validity of the threshold for capacity planning purposes.