How IT-Enabled Reimbursement Systems and Regulated Pricing Shape Provider Utilization Behavior: Evidence from Medicare Durable Medical Equipment

Medicare reimburses durable medical equipment (DME) using administratively determined prices processed through digital claims and reimbursement systems. While providers cannot adjust prices under this regulatory structure, they retain discretion over utilization decisions, creating potential operational responses to reimbursement incentives. However, how providers adjust utilization under such regulated reimbursement, particularly in the presence of heterogeneous behavioral responses, remains inadequately understood. Using provider-level Medicare data, we examine how reimbursement pressure, defined as the ratio of Medicare payments to submitted charges, influences the intensity of DME utilization. Our empirical analysis combines quantile and semiparametric methods to capture heterogeneous and nonlinear behavioral responses across providers. We document three main findings. First, higher reimbursement pressure is associated with greater average utilization intensity. Second, the response is highly heterogeneous across providers: lowintensity providers exhibit limited behavioral adjustment, whereas high-intensity providers respond strongly, producing substantial distributional shifts that are obscured by mean estimates. Third, provider responses are nonlinear and regime dependent. Both quadratic and threshold models indicate convex responses, with utilization sensitivity increasing sharply beyond certain reimbursement pressure levels. Decomposing utilization decisions further shows that higher reimbursement pressure is associated with provider exit from the market while remaining providers intensify service provision. Robustness checks confirm that these patterns are not driven by patient case mix, provider size, or outliers. Overall, our findings suggest that regulated reimbursement systems do not simply change aggregate utilization but redistribute service intensity across providers in a highly uneven manner. These results highlight the importance of accounting for heterogeneity and nonlinear operational responses when designing reimbursement policies in regulated healthcare markets.