Can financial incentives shift health care from an inpatient to an outpatient setting?

Can financial incentives affect hospital behaviour and shift care from a high-cost (inpatient) setting to a low-cost (outpatient) setting? We exploit a unique policy that switched from a reimbursement scheme where the tariff was substantively lower for outpatient care relative to inpatient care, to one where the tariff was higher for outpatient care than for inpatient care. The policy affected three common procedures in England. After developing a theoretical model of provider incentives, we use a difference-in-difference approach to evaluate the policy and find that it significantly increased the proportion of outpatient treatments by 36 percentage points for cystoscopy, 16.3 percentage points for hysteroscopy, and 3.8 percentage points for sterilisation. This substantial increase also improved quality for cystoscopy by reducing repeated procedures and emergency readmissions, had mixed effects on quality for hysteroscopy and did not affect emergency readmissions for sterilisation. We show that the policy did not increase total volume (the extensive margin) but had positive spillover effects on related unincentivised procedures. We also explore the distribution implications for the public insurer (the funder) and hospitals (the providers)