Do public hospitals respond to changes in DRG price regulation? The case of birth deliveries in the Italian NHS

We study how changes in Diagnosis‐Related Group price regulation affect hospital behaviour in quasi‐markets with exclusive provision by public hospitals. Exploiting a quasi‐natural experiment, we use a difference‐in‐differences approach to test whether public hospitals respond to an exogenous change in Diagnosis‐Related Group tariffs by increasing C‐section rates and/or by upcoding. Controlling for a detailed set of mother characteristics, we find that price changes did not affect the probability of a C‐section. We do however find evidence of upcoding: Conditional on the birth delivery method (either a C‐section or a vaginal delivery), public hospitals experiencing the largest price change exhibit a higher probability of treating patients coded as complicated. This finding suggests that even public hospitals may be sensitive to market incentives.