Do for-profit hospitals cream-skim patients? Evidence from inpatient psychiatric care in California

The paper examines whether, among inpatient psychiatric admissions in California, for-profit (FP) hospitals engage in cream skimming, i.e., selecting patients for some characteristic(s) other than their need for care, which enhances the profitability of the provider. We propose a novel approach to identifying cream skimming using cost outcomes. Naïve treatment effect estimates of hospital ownership type consist of the combined effects of differential patient case mix (selection) and hospital cost containment strategies (execution). In contrast, an instrumental variable (IV) approach can control for case mix and establish the causal effects of ownership type due to its execution. We interpret the difference between the naïve and IV treatment effects to be driven by FP hospitals’ selection based on unobserved patient case mix. Our findings on patient selection show that FP hospitals are more likely than their not-for-profit (NFP) counterparts to admit higher-cost patients (who tend to be less profitable under the existing inpatient psychiatric care payment systems), providing no evidence of cream skimming by FP hospitals. Furthermore, our estimates of hospital execution indicate that FP hospitals are more likely than NFP hospitals to deliver inpatient services at lower costs. These results may alleviate concerns about the recent proliferation of FP psychiatric hospitals, particularly regarding cream skimming in this market.