84 pages AEI Press  (Washington) Publication Date: January 2002 Paperback ISBN: 0844741744 Price: $ 10 Add to Cart   Examination Copies

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Teaching hospitals with "disproportionate" numbers of poor patients receiving special subsidies under Medicare, above and beyond the standard payments that all hospitals receive for treating Medicare patients. In recent years these subsidies have been criticized both for raising health care costs and for lacking evidence that they achieve the policy objectives used to justify them. In fact, the subsidies create perverse incentives for hospitals to train more physicians, close beds, and treat fewer uninsured patients.

In response to such criticism, the Balanced Budget Act of 1997 corrected some of the flaws in the teaching hospital subsidy but essentially left untouched the subsidies to hospitals that treat large numbers of poor patients. The costs of the latter subsidies remain unchecked, and the program's design still penalizes hospitals for admitting uninsured patients.

This study review the rationales, legislative history, and financial incentives of both types of hospital subsidies. After this detailed analysis, the author suggests alternative designs for the programs that could curb their costs and ensure they actually achieve the goals for which they were created.

The AEI Evaluative Studies series aims to promote greater understanding and continuing review of major activities of the federal government. Each study focuses on a government program or policy in operation by examining its purposes, adminstration, costs, and effectiveness and then recommends practical reforms for improved performance.

Sean Nicholson is an assistant professor in the health care systems department of the University of Pennsylvania's Wharton School. He has worked as a management consultant to the hospital industry and published widely on health economics.