Hospital Heterogeneous Responses to a Blended Payment Scheme Reform and the Distributional Consequences

Hospital payment schemes designed to control expenditure could also influence the medical resource allocation. We study hospital responses to the introduction of a blended payment scheme—a diagnosis‐based payment scheme with a predetermined global budget—and their distributional consequences. Exploiting a quasi‐experimental reform in China, we find hospitals respond by upcoding, shifting admissions toward categories with higher upcoding potential, and increasing total admissions. Hospitals’ heterogeneous responses widen the disparity in their payments, primarily through heterogeneous upcoding. Hospitals with more coding knowledge, greater reform exposure, higher tier, and larger size secure a larger share of the social health insurance fund.