Access Type

Open Access Dissertation

Date of Award

January 2011

Degree Type


Degree Name




First Advisor

Gail J. Summers


Does Medicare's payment rate for a hospital stay influence the quality of care received by a patient? We examine this question, theoretically and empirically. First, a model is developed which generates the key hypothesis -- that Medicare's payment rate per admission should be positively related to care quality. We then test this hypothesis by estimating the relationship between Medicare's DRG payment for pneumonia, heart failure and heart attacks and care quality, using clinically-recognized measures of the quality of pneumonia care, heart failure care and heart attack care. Newly available data on acute hospitals in 2007 from "Hospital Compare" (maintained by CMS) are analyzed. Similar results are provided from pneumonia care and heart failure care. We find a significant positive relationship between Medicare's payment rate and care quality for some hospitals in both pneumonia care and heart failure care, but not for others, and where it is significant, the effect on quality is small in magnitude in both cares. For a hospital with average characteristics, the effect of payment on quality is insignificant. However, for hospitals that are very highly paid for pneumonia or heart failure and hospitals that treat large numbers of pneumonia cases or heart failure cases, we find a positive significant relationship. For such hospitals, which likely derive substantial revenue from pneumonia care or heart failure care, an increase in Medicare's payment rate leads to a very small improvement in the quality of care provided.