Regulatory exploitation and management changes: Upcoding in the hospital industry

Leemore Dafny*, David Dranove

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

14 Scopus citations


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 notchange.

Original languageEnglish (US)
Pages (from-to)223-250
Number of pages28
JournalJournal of Law and Economics
Issue number2
StatePublished - May 2009

ASJC Scopus subject areas

  • Economics and Econometrics
  • Law


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