Regulatory exploitation and management changes : upcoding in the hospital industry/ created by Leemore Dafny and David Dranove

This paper investigates whether management teams that fail to exploit regulatory loopholes are vulnerable to replacement. We use the U.S. hospital industry in 1985-96 as a case study. A 1988 change in Medicare rules widened a preexisting loophole in the Medicare payment system, presenting hospitals with an opportunity to increase operating margins by 5 or more percentage points simply by “upcoding” patients to more lucrative codes. We find that having room to upcode is a statistically and economically significant predictor of whether a hospital replaces its management with a new team of for‐profit managers. We also find evidence that hospitals that replace their management subsequently upcode more than a sample of similar hospitals whose management did not change