Long‐Term Impact of Medicare Payment Reductions on Patient Outcomes

Objective

To examine the long-term impact of Medicare payment reductions on patient outcomes for Medicare acute myocardial infarction (AMI) patients.

Data Sources

Analysis of secondary data compiled from 100 percent Medicare Provider Analysis and Review between 1995 and 2005, Medicare hospital cost reports, Inpatient Prospective Payment System Payment Impact Files, American Hospital Association annual surveys, InterStudy, Area Resource Files, and County Business Patterns.

Study Design

We used a natural experiment—the Balanced Budget Act (BBA) of 1997—as an instrument to predict cumulative Medicare revenue loss due solely to the BBA, and basing on the predicted loss categorized hospitals into small, moderate, or large payment-cut groups and followed Medicare AMI patient outcomes in these hospitals over an 11-year panel between 1995 and 2005.

Principal Findings

We found that while Medicare AMI mortality trends remained similar across hospitals between pre-BBA and initial-BBA periods, hospitals facing large payment cuts saw smaller improvement in mortality rates relative to that of hospitals facing small cuts in the post-BBA period. Part of the relatively higher AMI mortalities among large-cut hospitals might be related to reductions in staffing levels and operating costs, and a small part might be due to patient selection.

Conclusions

We found evidence that hospitals facing large Medicare payment cuts as a result of BBA of 1997 were associated with deteriorating patient outcomes in the long run. Medicare payment reductions may have an unintended consequence of widening the gap in quality across hospitals.     

Hospitals respond to Medicare payment shortfalls by both shifting costs and cutting them, based on market concentration

The coverage expansions planned under the Affordable Care Act are to be financed in part by slowing Medicare payment updates to hospitals, thereby reigniting the debate over whether low prices paid by public payers cause hospitals to increase prices to private insurers--a practice known as cost shifting. Recently, the Medicare Payment Advisory Commission (MedPAC) proposed an alternative explanation of hospital pricing and profitability that could be used to support policies that pressure hospitals to reduce overall costs rather than to only raise prices. This study evaluated the cost-shift and MedPAC perspectives using 2008 data on hospital margins for 30,514 Medicare and privately insured patients undergoing any of seven major procedures in markets where robust hospital competition exists and in markets where hospital care is concentrated in the hands of a few providers. The study presents empirical evidence that, faced with shortfalls between Medicare payments and projected costs, hospitals in concentrated markets focus on raising prices to private insurers, while hospitals in competitive markets focus on cutting costs. Policy makers need to examine whether efforts to promote clinical coordination through provider integration may interfere with efforts to restrain overall health care cost growth by restraining Medicare payment rates.     

Inpatient–Outpatient Cost Shifting in Washington Hospitals

This paper empirically investigates the phenomenon known as "cost shifting" across inpatient and outpatient hospital services. That is, we examine whether, when faced with lower government reimbursement for outpatient services, providers raise inpatient prices for non-government patients (and analogously for lower inpatient government reimbursement). Using a panel of hospitals from Washington State, we find that private, nonprofit hospitals do cost shift across types of services. We also find that a firm's cost shifting behavior differs based on the type government insurance program (i.e., Medicare versus Medicaid). Government owned hospitals do not cost shift with respect to any type of government insurance plan.     

The relationship between the Balanced Budget Act (BBA) and hospital profitability

The Balanced Budget Act of 1997 (BBA) reduced the payment for fees for service providers and reduced the subsidy paid by the government for teaching hospitals. Since the passage of such cost containment measures, debates regarding their impact on hospitals, graduate medical education, and access to health care were raised. The need to examine the effect of such payment reduction on hospital profitability was widely ignored. We examined the relationship between the BBA and hospital profitability by using return on assets to measure profitability, by running an ordinary least squares regression for 1996 as pre-BBA and 1999 as post-BBA. We controlled for variables that were not included in previous literature, such as disproportionate share hospital status, critical access hospital status, and graduate medical education, measured by teaching hospitals to measure the effect of BBA cuts on teaching hospitals. Furthermore we incorporated several economic, financial, and utilization variables in the model. We used 1996 and 1999 data in our analysis to bridge potential effects of the BBA. To locate hospitals that changed ownership status we cross-matched the Medicare Cost Report data with the American Hospital Association Annual Survey. We found that overall hospital profitability declined as a result of the introduction of the BBA; however, small rural hospitals that converted to critical access status enjoyed improvement in financial status over the period of our study. Hospitals that converted to for-profit status did not improve in financial status, and showed a lower earning after the conversation. Our results show that the BBA had a negative effect on hospitals because of cuts in its reimbursement policy, except for critical access hospitals, which show improvement because of their exemption from the prospective payment system. Our study differs from others by using national comprehensive data for years that focus exclusively on the Balanced Budget Act period. We deliberately excluded any period that might be affected by the Balanced Budget Refinement Act (BBRA) of 1999, to clarify the severity of the BBA cut on hospital financial performance. Furthermore, because of the few studies that focused on the effect of the BBA on hospital profitability, this study is an important addition to the literature.     

Evidence of cost shifting in California hospitals

We used 1993-2001 data from private hospitals in California to investigate whether decreases in Medicare and Medicaid prices were associated with increases in prices paid for privately insured patients. We found that a 1 percent relative decrease in the average Medicare price is associated with a 0.17 percent increase in the corresponding price paid by privately insured patients; similarly, a 1 percent relative reduction in the average Medicaid price is associated with a 0.04 percent increase. These relationships imply that cost shifting from Medicare and Medicaid to private payers accounted for 12.3 percent of the total increase in private payers' prices from 1997 to 2001.     

Can cost shifting continue in a price competitive environment?

Both Medicare and Medicaid are reducing payments to hospitals, and there is widespread concern that hospitals may respond by increasing prices to privately insured patients. Theoretical models of hospital behaviour have ambiguous predictions as to whether, and under what circumstances, hospitals will shift costs to private payers. This paper extends previous theoretical models and then tests empirically using data from California for the 1983-1991 period, a time of increasingly intense price competition. Hospitals did increase their prices to private payers in response to reductions in Medicare rates; they had far smaller and generally insignificant responses to changes in Medicaid reimbursement. Hospital ownership and the competitiveness of the hospital market both affected this behaviour, but there was no significant change over time. The results suggest the need to broaden our models of hospital behaviour to 'embed' them in their local markets.     

The relationship between the Balanced Budget Act and length of stay for Medicare patients in US hospitals

Background  The Balanced Budget Act (BBA) of 1997 and Balanced Budget Refinement Act (BBRA) of 1999 led to deep financial cuts for hospitals and nursing homes. Objectives  We examine the effects of these acts on hospital length of stay (LOS) for Medicare recipients. Methods  Using data for all short-stay community hospitals in the country, we compared LOS for Medicare patients before and after the BBA/BBRA relative to known determinants of LOS, e.g., hospital ownership, region, beds, financial performance, and conversion/change in ownership type. Results  Hospital LOS was reduced as a result of the acts. Reductions were more apparent for larger urban hospitals that provided safety-net services. LOS varied slightly by hospital ownership. Conclusion  This study is among the first to evaluate the impact of BBA and BBRA on hospital services. These acts had a negative effect on the ability of hospitals to continue offering safety-net services and negatively affected LOS.      

The health care cost-shifting debate: could both sides be right?

Private payers and many industry analysts claim that hospital pricing strategy typically shifts health care costs from government payors to private payors. Economists believe, however, that hospitals would have maximized prices with previous market power, preventing any current opportunity to increase prices and shift costs. Economists have more recently claimed that a lack of competition is the reason for any cost shifting that may be occurring. Given issues such as hospital mission and governance, and the responses of hospitals to changing industry conditions, both parties may be correct in their cost-shifting assessment. Furthermore, understanding both viewpoints may be necessary to address adequately the cost-shifting issue and the future financing of health care.     

Variations in hospital resource use for Medicare and privately insured populations in California

The amount of resources used in the care of chronically ill Medicare fee-for-service (FFS) patients varies widely across hospitals. We studied variations across California hospitals in hospital resource use for chronically ill patients covered by Medicare health maintenance organizations (HMOs) and private insurers and found substantial variation in all of the coverage groups studied. Resource-use measures based on Medicare FFS data often reflect patterns evident for other payers. Previous estimates of savings if the most resource-intensive hospitals more closely resembled less resource-intensive hospitals, based on just Medicare FFS spending, could underestimate possible savings when other payers are taken into account.     

The welfare loss from hospital cost-shifting behavior: a partial equilibrium analysis

Cost shifting occurs when changes in administered prices of one payer lead to compensating changes in prices charged to other payers. Microeconomic theory suggests that cost shifting can take place under limited conditions and some empirical studies indicate that that hospital cost shifting may have actually occurred at various times. This study designs a model to conceptualize and quantify the potential welfare loss caused by hospital cost shifting under idealized yet fairly plausible conditions. The resulting estimate yields only a small efficiency loss of at most, 0.84% of private hospital expenditures in the US for 1992.     

Vulnerability of rural hospitals to Medicare outpatient payment reform

Because the Balanced Budget Act (BBA) of 1997 requires implementation of a Medicare prospective payment system (PPS) for hospital outpatient services, the authors evaluated the potential impact of outpatient PPS on rural hospitals. Areas examined include: (1) How dependent are rural hospitals on outpatient revenue? (2) Are they more likely than urban hospitals to be vulnerable to payment reform? (3) What types of rural hospitals will be most vulnerable to reform? Using Medicare cost report data, the authors found that small size and government ownership are more common among rural than urban hospitals and are the most important determinants of vulnerability to payment reform.     

BBA impacts on hospital residents, finances, and Medicare subsidies

Concern over rapidly rising Medicare expenditures prompted Congress to pass the 1997 Balanced Budget Act (BBA) that included provisions reducing graduate medical education (GME) payments and capped the growth in residents for payment purposes. Using Medicare cost reports through 2001, we find that both actual and capped residents continued to grow post-BBA. While teaching hospital total margins declined, GME payment reductions of approximately 17 percent had minimal impact on revenue growth (-0.5 percent annually). Four years after BBA, residents remained a substantial line of business for nearly one-half of teaching hospitals with Medicare effective marginal subsidies exceeding resident stipends by nearly $50,000 on average. Coupled with an estimated replacement cost of over $100,000 per resident, it is not surprising that hospitals accepted nearly 4,000 residents beyond their allowable payment caps in just 4 years post-BBA.     

Cost-Shifting from Private to Public Payers: The Scene Before Parity Legislation

BACKGROUND: Analyses that have been conducted previously on the implications of parity have focused on the concern that mental health costs of private payers will substantially increase. A complete analysis of the cost implications of parity, however, also needs to consider whether the mental health costs of public payers may increase particularly if employers or private insurers attempt to extrude enrollees with severe mental illness. This study examines the extent of mental health cost shifting from private to public payers during two separate two-year periods prior to the implementation of parity legislation. The results of the analyses can serve as a necessary baseline against which the consequences of parity legislation on this direction of cost-shifting can be examined. METHODS: The study utilizes an all payer data set that contains information on the use of specialty mental health services (excluding private practitioners) by adults in an urban and a rural county in New York State. For each year of two time periods -1991/1992 and 1995/ 1996 - consumers were classified into payer groups based on whether their services were paid for by "Private Only", "Public Only", "Private/Public", "Self Pay" or "Other" payers. The proportion of individuals who moved from one payer group to another from one year to the following year of each time period and the average yearly costs under these payers were examined. Logistic regression models were used to identify the characteristics of persons most likely to remain with Private Only Payers in contrast to those likely to shift to Private/Public Only payers or to Public Only Payers. RESULTS: In both two-year time periods, the percent of persons who shifted in one year from Private Only to either Private/Public or Public Only payers was small. In contrast, a person in the Private/Public group has more than a 12 percent likelihood of shifting to a Public Only payer in the subsequent year. The average annual costs of the Private/Public group were higher than that of any other payer group. The average annual costs of persons who shifted into the Private/Public group from any other payer group or remained there from the previous year were even higher. The logistic regression analyses for both time periods showed that persons who shifted from Private Only to Private/Public or Public Only payers in contrast to those who remained with Private Only payers were more likely to have subsidized incomes, be younger and have a mental health disability. In 1995, the likelihood of the shift was also increased for those who were nonwhite and/or had a substance abuse disability. IMPLICATIONS: This study has found that individuals rarely shift directly from private payers to public payers. Rather, they first shift to having services reimbursed by both private and public payers, and during this period their average total service costs are extremely high. Persons who shift from private payers to having at least some of their services paid by public payers in subsequent years appear to be either young employees or young dependents who have severe mental illness or mental illness disabilities. Abusing substances and/or being nonwhite also increase the likelihood of a shift to public payers. Along with parity mandates, there has been an increase in managed care controls. The extent to which these controls will be used to accelerate the movement of these high cost persons from private to public payers needs close watch.     

Medicare Home Health Care Patient Case-Mix Before and After the Balanced Budget Act of 1997: Effect on Dual Eligible Beneficiaries

The Balanced Budget Act (BBA) of 1997 changed the payment system for Medicare home health care (HHC) from cost-based to prospective reimbursement. We used Medical Expenditure Panel Survey data to assess the impact of the BBA on Medicare HHC patient case-mix measured by the Centers for Medicare and Medicaid Services Hierarchical Condition Categories (CMS-HCC) model. There was a significant increase in Medicare HHC patient case-mix between the pre-BBA and Prospective Payment System (PPS) periods. The increase in the standardized-predicted risk score from the Interim Payment System period to PPS was nearly 4 times greater for the dual eligibles (Medicare-Medicaid) than for the Medicare-only population. This significantly greater rise in the HHC resources required by dual eligibles as compared to nonduals could be due to a shift in HHC payers from Medicare only to Medicaid rather than be an actual increase in case-mix per se.     

Hospital volume responses to Medicare's Outpatient Prospective Payment System: Evidence from Florida

Effective in 2000, Medicare's Outpatient Prospective Payment System (OPPS) sets pre-determined reimbursement rates for hospital outpatient services, replacing the prior cost-based methods of reimbursement. Using Florida outpatient discharge data, we study the effect of OPPS on hospital outpatient volume. We find that on average Medicare rate cuts either decreased or had no significant effect on Medicare volume, but increased private fee-for-service (FFS) volume. We also find that responses vary with the hospital's "exposure" to Medicare payment changes, where exposure is measured as the baseline Medicare patient share. Compared to less exposed hospitals, highly exposed hospitals responded with larger increases in private FFS volume and with smaller decreases (in some cases, even increases) in Medicare volume when payment rates fell. Our results are consistent with provider demand inducement.     

Medicare payment policy and the controversy over hospital cost shifting

This article examines (i) the background and debate over cost shifting; (ii) hospitals as business institutions that often shift the financial responsibility for their costs in the form of differential pricing; and (iii) how the cost-shifting debate affects and is affected by Medicare. The aim is to gain a better understanding of how changes in reimbursement by large government health insurance programmes affect hospital behaviour. The article argues that the controversy over cost shifting is becoming an increasingly important issue for hospitals in the US and their ability (or willingness) to provide uncompensated charity care. The issue has also become very important for workers and their dependants. This is because workers have shouldered the largest portion of the dramatic growth in healthcare costs that have occurred in the US in recent years, due in large part to increased cost shifting (or 'sharing of financial responsibility') from their employers.     

The impact of PPS on hospital-sponsored post-acute services: a case study of Delaware Medicare providers

Hospitals were the first providers to experience the change in Medicare reimbursement from a cost basis to the prospective payment system (PPS). In the 1980s, this switch was accomplished through the development of diagnosis-related groups, a unique formula for Medicare reimbursement of inpatient hospital services. During that time, the concern was that, with the anticipated reduced payments to hospitals, adverse impacts on Medicare beneficiaries were likely, including premature release of patients from hospital care resulting in medical complications, increased readmissions, prolonged episodes of recuperation, and preventable mortality. The Balanced Budget Act of 1997 (BBA) mandated the implementation of the PPS for Medicare providers of skilled nursing home care and home health care. This change from cost-based reimbursement to PPS raised concerns that these providers would react as hospitals had done-that is, skilled nursing homes might limit their admission of Medicare patients and home health agencies might cut back on visits. As a result of that, hospitals might be faced with providing care for these post-acute patients without receiving additional reimbursement, and these changes in utilization patterns would be of critical importance to both providers and Medicare beneficiaries. This article examines the decisions that providers made in response to the perceived impact of the BBA. Qualitative data were derived from provider interviews. The article concludes with a discussion of how changes in Medicare reimbursement policy have influenced providers of post-acute care services to alter their level of participation in Medicare and the impact this may have on the general public as well as on Medicare beneficiaries.     

Rehab managers prepare to meet the challenge of the 90s

In this article, Health Systems REVIEW reports on the changes taking place in the lively rehabilitation hospital industry. Although exempt from the Medicare prospective payment system, rehabilitation hospitals are feeling the payment pinch experienced by their acute-care and psychiatric brethren in the delivery of government-paid services, as well as increased pressures from private payers.     

Multiple payers,commonality and free-riding in health care: Medicare and private payers

Managed health care plans and providers in the US and elsewhere sell their services to multiple payers. For example, the three largest groups of purchasers from health plans in the US are employers, Medicaid plans, and Medicare, with the first two accounting for over 90% of the total enrollees. In the case of hospitals, Medicare is the largest buyer, but it alone only accounts for 40% of the total payments. While payers have different objectives and use different contracting practices, the plans and providers set some elements of the quality in common for all payers. In this paper, we study the interactions between a public payer, modeled on Medicare, which sets a price and takes any willing provider, a private payer, which limits providers and pays a price on the basis of quality, and a provider/plan, in the presence of shared elements of quality. The provider compromises in response to divergent incentives from payers. The private sector dilutes Medicare payment initiatives, and may, under some circumstances, repair Medicare payment policy mistakes. If Medicare behaves strategically in the presence of private payers, it can free-ride on the private payer and set its prices too low. Our paper has many testable implications, including a new hypothesis for why Medicare has failed to gain acceptance of health plans in the US.