Do hospitals respond to decreasing prices by supplying more services?

Regulated prices are common in markets for medical care. We estimate the effect of changes in regulated reimbursement prices on volume of hospital care based on a reform of hospital financing in Germany. Uniquely, this reform changed the overall level of reimbursement—with increasing prices for some hospitals and decreasing prices for others—without directly affecting the relative prices for different groups of patients or types of treatment. Based on administrative data, we find that hospitals react to increasing prices by decreasing the service supply and to decreasing prices by increasing the service supply. Moreover, we find some evidence that volume changes for hospitals with different price changes are nonlinear. We interpret our findings as evidence for a negative income effect of prices on volume of care.