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.

The decision to vertically integrate services and deliver care has both management and policy concerns for healthcare in the United States. The change in reimbursement, which was enacted with the Balanced Budget Act of 1997, influenced the availability of post acute services for acute hospital inpatients. Prior to this change, post acute services were reimbursed based on cost similar to the pre DRG era of Medicare reimbursement. The change in payment had the potential to make discharging patients more difficult resulting in a prolonged length of stay without additional payment and at increased costs for hospitals. As a result of this change hospitals made arrangements to provide care for this population. The choices included vertical integration, contracting or hybrid arrangement and simply relying on the spot market. This makes or buy decision is a focus of this study. Were hospital decisions different after the BBA, than before this legislation?This study utilizes Oliver Williamson's transaction cost economics theory as the framework for the study and is a replication of a prior study by Chiu (1995) hybrid arrangement and simply relying on the spot market. This makes or buy decision is a focus of this study. Were hospital decisions different after the BBA, than before this legislation?This study utilizes Oliver Williamson's transaction cost economics theory as the framework for the study and is a replication of a prior study by Chiu (1995) The Williamsons theory is based on the proposition that three transaction dimensions determine the most efficient method of operation for a firm: uncertainty, frequency, and asset specificity. Depending on the "market", organizations may elect to arrange services through the spot market, contract for services, or vertically integrate the service. The study uses data from the American Hospital Association survey as well as the Area Resources files to determine if individual hospitals have made contract arrangements, vertically integrated, or relied on the spot market to provide skilled nursing services. Data is collected before and after the BBA and analyzed using multiple regression analysis and then subjected to significance testing. Sixteen hypotheses are tested that focus on the three dimensions of transaction cost theory. Findings support the importance of transaction frequency and asset specificity, while only weak support is offered for transaction uncertainty. The results differ from the Chiu study, which found strong support for uncertainty and weak support for frequency. This study is unique in that it examines data from two time periods surrounding a major reimbursement change in Medicare. It makes an important contribution to the empirical testing of transaction cost economics and the decision to vertically integrate in health care.