Hospitals respond to revenue caps by treating fewer higher-cost patients

 From WSJ:

Hospital care is the largest category of medical expenditure. It accounts for 41% of the cost of health insurance—more than doctor visits and prescription drugs put together.

Policy makers confront two problems when trying to reduce medical expenditures by setting "Global Budgets" or revenue caps:

• MORAL HAZARD: hospitals will treat fewer patients, and ...
• ADVERSE SELECTION: ... avoid higher-cost ones.

WHAT HAPPENED IN MARYLAND?

The Obama administration .. required Maryland to limit total revenue at each hospital—in ... in return for ...receiving higher Medicare and Medicaid reimbursements...

...the 2014 reform substantially eliminated the incentive for Maryland hospitals to attract and treat additional patients. From 2008 to 2023, the state went from treating 7% more hospital-admitted patients per capita [moral hazard] than nationwide levels to 18% fewer. The relative volume of outpatient care has also fallen.

...Community hospitals have increasingly dumped costly patients [adverse selection] on the state’s academic medical centers, which haven’t been fully compensated for the additional load and which typically are short of beds. ... Between 2012 and 2023, kidney-transplant rates statewide declined from 161% to 60% of the national average. Between 2014 and 2023, emergency department wait times in Maryland rose from 137% to 153% of nationwide levels—much longer than in any other state.

Increasing wait times is a higher ''price'' paid by patients, so it rations care to those willing to wait. But this higher price does not benefit the hospitals, so it doesn't give them an incentive to increase capacity. 

BOTTOM LINE: Better information about the effects of medical treatments can give decision makers more information which can allow them to design better incentives.