Administrative Burden and Consolidation in Health Care: Evidence from Medicare Contractor Transitions

Working Paper
Recent draft available here. BibTeX citation available here. FIOA’d contract transition documents are avaiable here.

Abstract: The US health care system is characterized by high administrative costs, the effects of which are theoretically ambiguous. Using exogenous changes to the jurisdictions of Medicare Administrative Contractors, I show that increases in a prominent type of administrative burden, claim denials, cause providers to invest in billing and consolidate into larger practices. These endogenous responses by providers fully offset the mechanical reduction in Medicare spending we would expect from the increase in claim denials. I explain this counterintuitive result using a model of firms’ investment in billing, estimates of which show that billing costs amount to $89 billion annually.

I discussed this paper on the Visible Hand podcast, which can be found here.