Incentives for Better Public Outcomes? Evidence from Public Hospitals

There is disagreement between the theoretical and empirical literature as to whether economic incentives can lead to better public outcomes. Work in this arena has largely consisted of formal modeling or studies within sectors that have a specific performance requirement over which citizens or bureaucrats have strong levels of influence such as welfare-to-work programs or education. Even in these studies the results have been decidedly mixed. This manuscript examines the role of incentives in public hospitals, a context where administrators are hard-pressed to ignore other standards in favor of the known payoff requirement. Using data from the Center for Medicare and Medicaid Services on hospital performance this study evaluates how the imposition of penalties on Medicare reimbursements affected the readmission ratios in public sector hospitals. Findings suggest that incentives have no effect. Additionally, the author suggests that the structure of public organizations makes it difficult to effectively implement incentives.