Inducing Participation and Performance Using Financial Incentives: Evidence from Medicare

Voluntary participation is a central feature of payment reforms that are being tested in US healthcare. These programs frequently incentivize provider participation with financial rewards linked to performance, although there are questions about their efficacy in attracting participants or on the treatment effects for participants drawn by such incentives. We inform this debate by studying the introduction of a voluntary Medicare payment reform to reduce spending on hospital surgeries. We show that hospitals with a higher financial gain predicted by the payment formula are more likely to participate. We leverage quasi-experimental variation in the potential financial gain to instrument for participation and quantify the treatment effect for “complier” hospitals: those induced to participate by the incentive. Although participating hospitals are disproportionately nonprofit overall, financial compliers are disproportionately of for-profit ownership. Compliers generate greater savings than the average participant by decreasing medical services more aggressively. Selection on favorable historical trends or changes in patient mix do not explain the savings. However, we detect some worsening of care quality in complier hospitals. Overall, the results suggest that the use of financial incentives increases both the participation in and the treatment effect of this voluntary program.