This paper examines the implications of regulatory change for input mix and technology choices of regulated industries. We study the increase in the relative price of labor faced by U.S. hospitals that resulted from the move from full cost to partial cost reimbursement under the Medicare Prospective Payment System (PPS) reform. Using the interaction of hospitals' pre-PPS Medicare share of patient days with the introduction of PPS, we document substantial increases in capital-labor ratios and declines in labor inputs following PPS. Most interestingly, we find that PPS seems to have encouraged the adoption of a range of new medical technologies. (c) 2008 by The University of Chicago. All rights reserved.

We show that even incomplete public insurance can crowd out private insurance demand. We estimate that Medicaid could explain the lack of private long-term care insurance for about two-thirds of the wealth distribution, even if no other factors limited the market's size. Yet Medicaid provides incomplete consumption smoothing for most individuals. Medicaid's crowd-out effect stems from the large implicit tax (about 60–75 percent for a median-wealth individual) that Medicaid imposes on private insurance. An implication is that public policies designed to stimulate the private insurance market will have limited efficacy as long as Medicaid's large implicit tax remains. (JEL G22, I18, I38)

Preference Heterogeneity and Insurance Markets: Explaining a Puzzle of Insurance by David M. Cutler, Amy Finkelstein and Kathleen McGarry. Published in volume 98, issue 2, pages 157-62 of American Economic Review, May 2008