Firm Response to Low-Reimbursement Patients in the Market for Unscheduled Outpatient Care

Americans spent 13,400 person-years waiting in emergency departments (EDs) in 2009 alone, a figure that has been increasing at a compounded rate of 3.5% per year since at least the early 1990s. Furthermore, the quantity of emergency department services demanded has increased by 3.1% annually, but the supply of ED services has not increased concomitantly. This dissertation develops a theoretical model which explains this lack of supply response. In the model, consistent with anecdotal and cross-sectional evidence, hospitals are constrained from setting individual wait times based on non-clinical factors. However, the hospital chooses an overall set of policies (staffing levels, adoption of operations management innovations, etc.) which produces a hospital-wide baseline wait time. The hospital's wait time is endogenous to the mix of patient profitabilities. Demand depends on the time price of services. The model predicts that higher wait times result from increased proportions of Medicaid and uninsured patients. A novel census of emergency department wait times in two states (MA, NJ) is used to test these predictions. First, the model's assumption that hospitals are constrained in setting individual wait times based on profitability is supported by cross-sectional regression coefficients: hospitals with 50 percentage point greater uninsurance rates have 26.0 minute longer wait times (p<.01; national mean wait time is 58 minutes), whereas conditional on hospital uninsurance rate individuals who are uninsured are not shown to have longer wait times (coefficient of 0.86 minutes, p=0.13). Next I use cross-sectional models which instrument for area uninsurance/Medicaid rates, models assessing the effect of entry of urgent care clinics into the market (since these clinics see predominantly insured, less severely injured patients), and triple-difference estimates of the differential effect of Massachusetts' insurance expansion across the change in hospital insurance mix. Results support the theoretical model's conclusions. The recent national expansion of insurance may mitigate the negative externality on the privately insured, providing a substantial welfare gain to those who do not otherwise benefit from the Affordable Care Act. Given the uncertainty as to the marginal costs of ED care, however, the full welfare implications are unknown.