Reimbursement decisions for hospital services: the case of psychiatric units under Medicare.

If the hospital meets specific requirements, under Medicare's Prospective Payment System (PPS) psychiatric units of general hospitals can apply for and receive an exemption from DRG-based payment. I find empirical evidence that the decision to seek an exemption is affected by a complex set of financial considerations. In addition to the difference in expected payment that would result from exempt versus nonexempt status, other factors at work include a facility's dependence on Medicare for revenues and its attitude toward aggressively gaming Medicare reimbursement options. These results indicate the importance of exemption options in an increasingly competitive market for specialized hospital services.