The effect of Medicare reimbursement regulation on hospital balance sheet composition

This study investigates the impact of changes in Medicare reimbursement regulation on hospital capital investment and financing decisions. The regulation being investigated changed reimbursement for hospital inpatient capital costs from a cost-based to a fixed fee per patient system and was intended to change the inflationary incentives of cost-based reimbursement by altering the incentives of hospitals towards more efficient capital investment. It eliminated previous regulatory incentives to overinvest and use debt financing, and eliminated implicit guarantees of hospital debt service.;I find only marginal evidence that changes in capital investment behavior resulted from the regulation, and evidence that the regulation had larger effects on certain hospitals. In addition, I find that hospitals decreased the use of long-term debt, and some evidence that interest rates on hospital debt increased. However, the differential impact of the regulation across hospitals and the impact on debt financing patterns call into question whether policy objectives were fully achieved.