US policy increasingly ties payments for providers to performance on quality measures, though little empirical evidence guides the design of such incentives. I deploy administrative data to study a large federal program that penalizes hospitals with high readmissions rates. Using policy-driven variation in the penalty incentive across hospitals for identification, I find that hospital responses to the penalty account for two-thirds of the observed decrease in readmissions over this period, as well as a decrease in heart attack mortality. Quality improvement accounts for about one-half of the decrease in readmissions; the remainder is explained by selective admission of returning patients.

We document four similarities between American human healthcare and American pet care: (i) rapid growth in spending as a share of GDP over the last two decades; (ii) strong income-spending gradient; (iii) rapid growth in the employment of healthcare providers; and (iv) similar propensity for high spending at the end of life. We speculate about possible implications of these similar patterns in two sectors that share many common features but differ markedly in institutional features, such as the prevalence of insurance and of public sector involvement.