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What Do Hospitals Do When Medicare Cuts Hospital Prices?

By Truven Staff
Tracy Yee imageOne of the key provisions in the Affordable Care Act (ACA) permanently lowers the default rate of growth in Medicare prices for hospitals and most other providers by applying a downward adjustment each year equal to the growth in the economy. The Congressional Budget Office estimates that policy change will reduce Medicare expenditures by $379 million from 2012 through 2021. Researchers and policymakers have theorized that this approach may lead hospitals to try to recoup their anticipated losses in a number of ways—one of which would be increasing inpatient hospitalizations in an attempt to “make it up on volume.”

To test this theory, Chapin White, a senior researcher at the Center for Studying Health System Change, and I recently completed analyses to examine whether changes in Medicare prices were associated with changes in Medicare inpatient patient volume. We examined the relationship between market-level price trends and trends in the number of inpatient hospital discharges among the elderly (65+ years of age) across 10 states over a 15 year period (1995-2009).

Overall, we observed that by 2009, inpatient hospital stays were much shorter and patients received much more intensive treatment. Taking a closer look, we found that hospital markets with lower growth in Medicare prices had smaller increases in hospital utilization and greater decreases in length of stay compared to markets with higher growth in Medicare prices. These results suggest that Medicare price cuts lead hospitals to reduce capacity and provide fewer services to the elderly. When we simulated the effect of a 10 percent decrease in the Medicare price, we found that discharges of elderly patients decreased by 4.6 percent and the number of hospital staffed beds decreased by 6.3 percent.

Our findings run counter to the notion that hospitals will attempt to recoup losses from Medicare price cuts by increasing inpatient volume. Rather than leave beds empty, hospitals appear to constrain their scale of operations. In this way, hospitals appear to behave as profit-maximizing firms that increase output when they are paid higher prices and decrease output when the costs of production rise. Considered in the context of the ACA price cuts, findings suggest that Medicare savings may actually be larger than expected due to hospitals volume response. Conversely, if the Medicare provisions in the law were repealed, Medicare spending might increase by more than has been projected. Our findings also point to important questions for future research – in particular, examining the impact of Medicare price reductions on the quality of care beneficiaries receive, as well as their overall health outcomes.

Tracy Yee
Research Leader
Behavioral Health and Quality Research Division