Provider payment incentives: Evidence from the U.S. hospice industry

Combining capitation with a cap on health care providers’ average revenue can reduce allocative inefficiency. But the cap may be undercut by health care providers who churn their patient censuses. We investigate this possibility in the U.S. hospice industry, where Medicare pays hospice programs fixed daily rates but caps their average annual revenue. By leveraging variation generated by the cap’s nonlinear design and the transition between fiscal years, we find that programs on track to exceed the cap raise enrollment rates by 5.8 % and live discharge rates by 4.3 % in the fourth quarter. But this churning falls far short of eliminating their financial penalties: it amounts to 10 % of an average program’s excess revenue at most. Marginal enrollees have longer remaining lifetimes and more fragmented hospice spells on average, suggesting weaker intrinsic demand for hospice care. We discuss the cap’s implications for market structure.