Date of Award


Degree Name

Doctor of Philosophy



First Advisor

Dai, Chifeng

Second Advisor

Sylwester, Kevin


This dissertation seeks to investigate how hospital reimbursement policy affects the quality of care provided to patients when providers compete for healthcare labor that is limited in supply. Cost payment systems fully reimburse a provider’s the total cost of healthcare provided, fixed reimbursements are predetermined at a fixed amount and mixed reimbursements have a cost and fixed component. The first chapter investigates how government reimbursement schemes that induce quality competition among health providers affects the choice of quality of care provided to patients and how these choices depend on the labor supply constraints in the healthcare labor market. We build a theoretical model that explicitly incorporates the healthcare labor supply into a framework of a hospital cournot competition, to show how a hospitals' choice of quality of patient care will be directly influenced when there is a shortage of health personnel in a regulated reimbursement system. We find that multiple equilibria can arise in healthcare markets depending on the consumers’ sensitivity to quality and hospitals’ share of cost when investing in quality. Contrary to existing findings, we are able to show that the effects of reimbursement schemes can vary in different equilibria and in different labor market situations. For instance, in high patient quality sensitivity hospital markets under a high hospital quality equilibrium, we can show that a cost payment scheme decreases a provider’s quality of care while a fixed reimbursement scheme increases quality. More importantly we find that the labor market constraint increases or decreases the effect of the reimbursement system on quality of care. Consequently, the labor constraint changes the quality choice of the provider as compared to the quality level that would have been induced by a particular reimbursement’s policy incentive for quality. In the second chapter, we carry out some of the testable implications of the theoretical finding from the first chapter. This paper investigates how higher Medicare payments brought about by geographical reclassification affects a provider’s quality of care as captured by registered nurses (RN) and licensed practical nurses (LPN) staffing, as well as patient outcomes (mortality, urinary tract infections, pneumonia, peptic ulcer deep vein thrombosis) and length of stay when hospitals compete for nurses. In contrast with past literature, we specifically allow for asymmetry in the hospital’s choice of quality, by permitting coefficients to differ across reclassified hospitals in response to the higher Medicare payments. This asymmetry is based on the relativity of the labor cost faced by the hospital due to competition for nurses in the healthcare labor market. Using Healthcare Cost and Utilization Project (HCUP) and the Center for Medicare and Medicaid (CMS) data from the period 2001 to 2011, we find that hospitals who face relatively higher labor costs will post reclassification increase their RN to LPN staffing ratio as compared to hospitals in their post geographical reclassification areas. A higher RN staffing by these hospitals will result in an improvement of quality of care as the incidence of patient complications due to Pneumonia, Peptic Ulcer and Deep Vein Thrombosis reduces for hospitals that were reclassified after allowing for asymmetry in response to the higher Medicare payment due to differences in labor costs (Pneumonia and Peptic Ulcer complications improve as compared to pre re-class area hospitals and DVT in both pre/post re-class area hospitals). Length of stay also increases for hospitals that faced a higher labor cost while mortality and UTI complications remain unchanged post reclassification. Finally, in the third chapter, we examine how the for profit (FP) or not for profit (NFP) status of hospitals impact the choice of nurse staffing and patient outcomes when there is an increase in provider reimbursement due geographical reclassification. Most of the past studies focus on mortality and length of stay in FPs and NFPs, we extend these studies by investigating the impact of geographical reclassification on patient outcomes that have been established as outcomes sensitive to nursing care. From our regression results, with reference to the ratio of RN to LPN staffing, we find evidence that an increase in Medicare payments will have a greater impact in FPs than in NFPs as compared to their pre re-class geographical area control hospitals. We also find that in hospitals that face a relatively higher labor cost as compared to their controls; (1) There is no difference in the impact of reclassification between FPs and NFPs (2) There is a better response from FPs than NFPs to geographical reclassification when the outcome considered is DVT as evidenced by a decreases in cases of DVT (3) NFPs decrease length of stay whiles FPs increase length of stay as compared to their post re-class geographical area hospitals.

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