Screening Through Soft Spending Limits: Evidence from the Medicare Therapy Cap

Ashvin Gandhi and Maggie Shi

No 33722, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Governments and firms often employ soft spending limits to restrict overspending while still allowing exceptions on a case-by-case basis. This paper studies a Medicare policy which capped per-patient physical therapy spending, with exceptions for patients with documented medical need. The cap reduced spending by 8 percent without harming patient health, with the targeting improvements driven by Medicare discretion in granting exceptions rather than improved provider screening. However, the documentation requirement also introduced horizontal inequity: conditional on need, lower-income and minority patients were more likely to be screened out, as they tended to see providers with poorer documentation practices.

JEL-codes: H30 H51 I1 I13 I18 (search for similar items in EconPapers)
Date: 2025-04
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