Virtuous spillover effects of quality penalties on the continuity of health care

Abstract Ensuring continuity of care for patients after an intensive hospitalization episode is a complex dilemma that plagues the US health‐care system. Despite its influence on health outcomes such as mortality and readmissions, it is difficult to construct policy instruments such as report cards or penalties for improving continuity of care due to the fragmented nature of post‐intensive hospitalization care. However, policy instruments that target other related health outcomes can also benefit continuity of care. We examine whether a quality regulation that penalized hospitals for excess readmissions has implications for an unregulated aspect, that is, continuity of care through intra‐ailment and spillover effects. Intra ‐ailment effects occur from the effects of penalty regulation on the continuity of care of ailments targeted for regulation. Spillovers occur from the effects of penalty regulation on continuity of care for ailments that were not targeted by the policy but share complementarities with targeted ailments. We conduct difference‐in‐differences analyses using patient‐level data for 2004–2014 from the state of California. Our empirical strategy utilizes the nature of the hospital production function, which is organized by medically related specialties. We construct three cohorts of patients, all of whom belong to specialties that house the ailments targeted for readmission penalties. These include (1) ailments targeted by the penalty policy for readmissions, (2) closely related, non‐targeted ailments, and (3) unrelated ailments. Results reveal evidence of intra‐ailment effects, which manifest as increases in continuity of care of targeted ailments, and spillovers, which manifest as increases in continuity of care of non‐targeted but related ailments. We find that processual mechanisms, such as the source of patient admissions and length of stay, and structural mechanisms, such as system size, accentuate the intra‐ailment effects. Our study provides novel insights into how quality regulation can have intra‐ailment and spillover effects and bespeaks the importance of incorporating these effects in the regulatory benefit‐cost calculus.