Do hospitals respond to changing incentive structures? Evidence from Medicare's 2007 DRG restructuring

In 2007, the Centers for Medicare and Medicaid restructured the diagnosis related group (DRG) system by expanding the number of categories within a DRG to account for complications present within certain conditions. This change allows for differential reimbursement depending on the severity of the case. We examine whether this change incentivized hospitals to upcode patients as sicker to increase their reimbursements. Using the National Inpatient Survey data from HCUP from 2005 to 2010 and three methods to detect the presence of upcoding, our most conservative estimate is an additional three percent of reimbursement is attributable to upcoding. We find evidence of upcoding in government, non-profit, and for-profit hospitals. We find spillover effects of upcoding impacting not only Medicare payers, but also private insurance companies as well.