Cream skimming: Theory and evidence from hospital transfers and capacity utilization

Abstract The paper examines cream skimming behaviour by studying hospital transfers in a mixed public-private hospital system. A key innovation is the use of capacity utilization to identify cream skimming. We develop a dynamic model with uncertain patient arrivals and hospital capacity constraints to clarify the conditions under which a profit maximizing hospital will engage in patient selection by transferring ‘hard’ patients—those with severe/complex conditions—to free up capacity to accommodate ‘easy’ patients with few severe/complex conditions. Given finite capacity, public hospitals are strictly less likely to transfer patients than profit-motivated private hospitals at the same level of capacity. We test implications of the model using hospital administrative data from Victoria, Australia, and find empirical support for the cream skimming predictions of the model.