Early discharge policy, common in the developed countries, refers to the reduction of hospital length of stay as a way of reducing the cost of care. The effect of the policy on quality of care has received a lot of attention in the literature. Some of the earlier papers have ignored the endogeneity of length of stay in the readmission equation, an approach that could lead to inconsistent estimation. This study develops a statistical technique for the consistent estimation of the effect of the early discharge policy. An instrument that can be used extensively across different diagnostic groups is provided, hence solving the difficult problem of finding an instrument for length of stay. The exogeneity test in Gorgger (1990), the test for weak instruments in Staiger and Stock (1997) as well as the Hensen (1982) for over identification confirmed respectively that length of stay is endogenous the instrument is strong and the valid.
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