Do Hospitals Cross Subsidize?

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Executive Summary

Cross-subsidies are often considered the principal mechanism through which hospitals provide unprofitable care. Yet, hospitals' reliance on and extent of cross-subsidization are difficult to establish. The authors exploit entry by cardiac specialty hospitals as an exogenous shock to incumbent hospitals' profitability and in turn to their ability to cross-subsidize unprofitable services. Using patient-level data from general short-term hospitals in Arizona and Colorado before and after entry, they find that the hospitals most exposed to entry reduced their provision of services considered to be unprofitable (psychiatric, substance-abuse, and trauma care) and expanded their admissions for neurosurgery, a highly profitable service.

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