A rural crossroad

The critical access hospital program is one of the few positive things for hospitals to come out of the 1997 Balanced Budget Act. It has meant salvation for the nearly 1,200 hospitals that have received the designation, and enables them to invest in facility upgrades, new equipment and additional staff. But a revamped Medicare managed care initiative threatens their payments and the Centers for Medicare & Medicaid Services and the Medicare Payment Advisory Program are taking a hard look at the program's costs. Some observers fear changes could be proposed that would weaken the CAH program.     

Medicare's disproportionate share adjustment and the cost of low-income patients

We investigated whether or not hospitals have higher costs for inpatient care provided low-income Medicare patients, after controlling for other cost differences already accounted for by Medicare payments. We estimated differences in Prospective Payment System-adjusted costs and outlier-adjusted length of stay for low-income patients relative to matching non-low-income cases from the same hospital in 85 high-volume diagnosis-related groups (N = 1,247,670). Low-income Medicare patients do not have costlier hospital stays, although their stays are 2.5% longer. We conclude that disproportionate share payments are not justified on grounds of higher treatment costs.     

A decade of Medicare's prospective payment system--success or failure?

The growth in Medicare spending for inpatient hospital services slowed following the implementation of the prospective payment system (PPS) due to a decline in admission rates and limits on payment increases. Hospital costs, however, have increased faster than payments. Rather than reducing costs further, hospitals responded by charging privately insured patients more than the costs of their care and developing new revenue sources. PPS also redistributed Medicare payments across hospitals and was associated with increased spending in other settings. The PPS experience leaves policymakers with some immediate challenges and provides insights for the development of health care reform initiatives.     

Healthcare's crown jewels. A looming 15% reduction in Medicare payments could tarnish the financial viability of teaching hospitals,studies say. Others,however, say they'll keep shining despite the scheduled cuts

Though saddled with higher costs than other hospitals, teaching hospitals reap plump margins on Medicare. But that could change this fall. A volley of studies say a looming 15% cut in indirect medical education payments and disproportionate-share payments could threaten the financial viability of healthcare's crown jewels unless Congress reverses current law.     

Cost differences between hospice and nonhospice care. A comparison of insurer payments and provider charges.

Although it has been postulated that hospice care savings are "biased" when costs are measured in terms of insurer payments instead of provider charges, this claim has not been documented by research. This article examines cost differences between hospice and nonhospice care, first, by analyzing Medicare Part A payments and, second, by studying provider charges for services rendered to a population of 24 cancer patients during their last 24 weeks of life. The exploratory results of the study showed that although the cost savings derived from analyzing provider charges were about double those based on Medicare Part A payments, both approaches to the measurement of cost strongly indicated that hospice home care was less costly than nonhospice care. Further analysis showed that variations in the rates of Medicare reimbursement accounted for 22 to 42% of the differences in the derived cost savings between the two approaches to measuring cost, and that payments to hospitals played a major role in determining this outcome.     

A longitudinal study of the effects of graduate medical education on hospital operating costs

OBJECTIVE: To examine the effect of graduate medical education sponsorship on hospital operating costs over a seven-year period, to test for a longitudinal association between teaching intensity and cost, and to determine whether the indirect medical education (IME) payment adjustments made under Medicare's Prospective Payment System are appropriate. DATA SOURCES: Medicare cost and payment data from the Hospital Cost Report Information System and other related HCFA files, from FFY 1989 through 1995. The study population consists of all short-stay hospitals (approximately 5,000) participating in Medicare and receiving case payments by diagnosis-related groups. STUDY DESIGN: The original cost functions used to develop indirect medical education payment adjustments under PPS are re-estimated with panel data. Specification changes are included based on findings from critiques of the original hospital cost model. Additional variations on the model are explored to test for differences by hospital status, to control for the effect of additional disproportionate share and outlier payments, and to isolate the effects of improved case-mix measurement on model results. PRINCIPAL FINDINGS: Fixed effects regression produces no evidence of a significant within-hospital association between increased sponsorship of medical residents and increased cost per case. In models designed to capture a cross-sectional association, operating costs are positively related to teaching activity, but the association shows a decline in strength over time. In all years, the strength of the association is significantly greater among hospitals eligible for disproportionate share adjustments and among major teaching hospitals. Controlling for secular trends of increased teaching intensity results in a pattern of declining cross-sectional teaching coefficients that supports a theory that observed teaching effects are the result of unmeasured case severity. CONCLUSIONS: A significant but declining cost differential is observed between teaching and nonteaching hospitals. The association appears to be related to hospital and patient characteristics that cannot be controlled using currently available case-mix and wage indices. Longitudinal models do not provide evidence to support a payment adjustment formula that allows individual hospitals to recompute their IME adjustment rates as their teaching ratios rise or fall from year to year. Cross-sectional findings suggest that re-estimations of the teaching effect may be appropriate when significant improvements occur in Medicare case-mix measurement.     

Medicare dependent hospitals: who depends on whom?

Small rural hospitals with a large proportion of Medicare patients currently receive special treatment as Medicare dependent hospitals (MDHs) under the prospective payment system (PPS). Other high Medicare hospitals (HMHs)--both urban and rural--have sought to have the additional per case payments extended to them. Current utilization patterns, the availability of alternative facilities, and the socioeconomic and demographic characteristics of the service areas were examined to determine whether either the current MDH or alternative HMH targeting criteria identify hospitals whose closure might impair access to care for Medicare beneficiaries residing in their service areas. Neither MDHs nor HMHs are substantially different from other hospitals in terms of providing access. While some individual MDHs or HMHs might be considered essential access facilities, alternate criteria should be developed to identify these facilities regardless of the proportion of their patients attributable to the Medicare program.     

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.     

The incentive effects of the Medicare indirect medical education policy

Medicare provided teaching hospitals with US$ 5.9 billion in supplemental graduate medical education (GME) payments in 1998. These payments distort input and output prices and provide teaching hospitals with incentives to hire residents, close beds, and admit more Medicare patients. The structure of the GME payment policy creates substantial variation in input and output prices between teaching hospitals. We examine the extent to which hospitals responded to these financial incentives using a panel data set of 3,900 hospitals, including over 900 teaching hospitals. We find that teaching hospitals did hire residents and close beds in response to the Medicare policy, but did not increase Medicare admissions or alter their use of registered nurses (RNs).     

Medicare payment for selected adverse events: building the business case for investing in patient safety

This study estimates that Medicare extra payments under the hospital prospective payment system (PPS) range from about $700 per case of decubitus ulcer to $9,000 per case of postoperative sepsis in the five types of adverse events identifiable in Medicare claims. Medicare extra payment for the five types of events totals more than $300 million per year, accounting for 0.27 percent of annual Medicare hospital spending. But these extra payments cover less than a third of the extra costs incurred by hospitals in treating these adverse events. We conclude that both Medicare and hospitals gain financially by improving patient safety.     

Medicare's operational history and impact on health care

Medicare was originally designed in the 1960s to fit into the existing health care delivery system. However, the program's early years showed an inflationary impact on health care costs. Medicare was the second largest federal domestic program and the fastest growing one, making it a target for those concerned about the size of government in general. By 1980, Medicare constituted 15% of the nation's expenditures for personal health care; and Medicare's administrators recommended substantive changes in provider payments through the introduction of the prospective payment system. Prospective payment system legislation impacted hospitals initially and later skilled nursing facilities and home health agencies. As policymakers made changes in Medicare payments to providers, providers made changes in the way services were delivered. What eventually evolved, in an insidious manner, was implicit management of the nation's health care delivery system by the Medicare program.     

Medicare-the development of publicly financed health insurance: Medicare's impact on the nation's health care system

It is useful for health care managers to understand Medicare's history and the impact on providers of ever-changing Medicare payment methods. Initially, Medicare payments resembled those of commercial insurance plans and Blue Cross Blue Shield plans. When Congress became concerned about the increasing costs of Medicare, new payment methods were created to limit payments to providers. The prospective payment system, imposed on hospitals in 1987 and later on nursing homes, home health agencies, and other services, has been adapted by commercial plans, Blue Cross Blue Shield associations, and state Medicaid programs. Changes in payer reimbursements require health care managers to adjust the department's charge master and exert more control of departmental costs. The story of Medicare's beginnings and development can provide some insight into the possibility of national health insurance, given the historic and current politics that limit publicly financed social programs. This article discusses the development of Medicare and its administration and serves as an introduction to the complex realities of health care reimbursement policy.     

Impact of Critical Access Hospital Conversion on Beneficiary Liability

ABSTRACT: Context: While the Medicare Critical Access Hospital (CAH) program has improved the financial viability of small rural hospitals and enhanced access to care in rural communities, the program puts beneficiaries at risk for paying a larger share of the cost of services covered under the Medicare part B benefit. Purpose: This paper examines the impact of hospital conversion to CAH status on beneficiary out‐of‐pocket coinsurance payments for hospital outpatient services. Methods: The study is based on a retrospective observational design using administrative data from Medicare hospital cost reports and fee‐for‐service beneficiary claims from 1999 to 2003. The study compares changes in beneficiary co‐payments before versus after CAH conversion with payment trends among small rural non‐converting hospitals over the same period. Findings: Conversion to CAH status is associated with an increase in beneficiary coinsurance payments per outpatient visit of $17.19, equivalent to 34% of the sample average. However, CAH designation had no significant effect on the share of outpatient costs paid by the beneficiary. Most of the increase in beneficiary liability associated with conversion is attributable to the provision of more services per outpatient visit. Conclusions: While this and other studies show that conversion to CAH status results in more intensive outpatient care, CAH conversion does not appear to inadvertently create financial barriers to accessing ambulatory services in remote rural communities by forcing beneficiaries to pay a higher share of their Medicare part B costs.     

A longitudinal comparison of charge-based weights with cost-based weights

The diagnosis-related group weights that determine prices for Medicare hospital stays are recalibrated annually using charge data. Using data from fiscal years 1985 through 1987, the authors show that differences between these charge-based weights and cost-based weights are increasing only slightly. Charge-based weights are available in a more timely manner and, based on temporal changes in the weights, we show that this is an important consideration. Charge-based weights provide higher payments than cost-based weights to hospitals with higher case-mix indexes, but have little effect on hospitals with low cost-to-charge ratios, high capital costs, or high teaching costs.     

Medicare graduate medical education funding and rural hospitals

To assess the importance of medical residents to rural hospitals, and to predict the possible effect of reductions in Medicare graduate medical education (GME) payments, data from Medicare hospital cost reports and from a telephone survey of rural hospitals with residency programs are analyzed. In prospective payment system year 11, 70 rural hospitals received more than $80 million in Medicare GME payments. The presence of rural training programs enhanced staff physician recruitment and retention and led to increased numbers of physicians settling in communities surrounding the facilities. Many survey respondents felt that elimination of GME funds would results in downsizing or outright elimination of their training programs. The results support the contention that rural training programs are important to hospitals and their surrounding communities and provide an essential component of the physician supply pipeline to rural areas.     

Should Medicare compensate hospitals for administratively necessary days?

Days that a patient remains in a hospital due to inability to secure nursing home placement are termed administratively necessary days (ANDs). Some hospitals under Medicare's prospective payment system have incurred discharge delays of this kind. Nursing home bed supply is one major problematic factor; others include adequacy of Medicare nursing home reimbursement rates relative to nursing home costs in an area, the willingness of facilities in an area to serve those needing skilled care, and stringency of relevant Medicaid reimbursement policy. Two promising approaches for dealing with ANDs are increasing nursing home reimbursement rates, and adjusting Medicare payments for exceptionally long-staying patients or those requiring exceptionally intensive care in hospitals.     

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.     

Quality and Cost of Care by Hospital Teaching Status: What Are the Differences?

Policy Points

• In two respects, quality of care tends to be higher at major teaching hospitals: process of care and long‐term survival of cancer patients following initial diagnosis. There is also evidence that short‐term (30‐day) mortality is lower on average at such hospitals, although the quality of evidence is somewhat lower.
• Quality of care is mulitdimensional. Empirical evidence by teaching status on dimensions other than survival is mixed.
• Higher Medicare payments for care provided by major teaching hospitals are partially offset by lower payments to nonhospital providers. Nevertheless, the payment differences between major teaching and nonteaching hospitals for hospital stays, especially for complex cases, potentially increase prices other insurers pay for hospital care.

ContextThe relative performance of teaching hospitals has been discussed for decades. For private and public insurers with provider networks, an issue is whether having a major teaching hospital in the network is a “must.” For traditional fee‐for‐service Medicare, there is an issue of adequacy of payment of hospitals with various attributes, including graduate medical education (GME) provision. Much empirical evidence on relative quality and cost has been published. This paper aims to (1) evaluate empirical evidence on relative quality and cost of teaching hospitals and (2) assess what the findings indicate for public and private insurer policy.MethodsComplementary approaches were used to select studies for review. (1) Relevant studies highly cited in Web of Science were selected. (2) This search led to studies cited by these studies as well as studies that cited these studies. (3) Several literature reviews were helpful in locating pertinent studies. Some policy‐oriented papers were found in Google under topics to which the policy applied. (4) Several papers were added based on suggestions of reviewers.FindingsQuality of care as measured in process of care studies and in longitudinal studies of long‐term survival of cancer patients tends to be higher at major teaching hospitals. Evidence on survival at 30 days post admission for common conditions and procedures also tends to favor such hospitals. Findings on other dimensions of relative quality are mixed. Hospitals with a substantial commitment to graduate medical education, major teaching hospitals, are about 10% to 20% more costly than nonteaching hospitals. Private insurers pay a differential to major teaching hospitals at this range''s lower end. Inclusive of subsidies, Medicare pays major teaching hospitals substantially more than 20% extra, especially for complex surgical procedures.ConclusionsBased on the evidence on quality, there is reason for patients to be willing to pay more for inclusion of major teaching hospitals in private insurer networks at least for some services. Medicare payment for GME has long been a controversial policy issue. The actual indirect cost of GME is likely to be far less than the amount Medicare is currently paying hospitals.     

Cost-benefit analyses of California family practice residencies

Several national commissions have recommended that family practice residency training be subsidized, but without stating how much support is needed. Financial studies of graduate medical education have used the methods of cost allocation or joint-products cost analysis. Previous cost-allocation studies indicate that one third of family practice residency costs are met by extramural subsidy. Cost reports of eight California public hospitals with a single family practice residency program were evaluated for the 1984-85 fiscal year. Discrepancies in the education costs reported to Medicare and those reported in state hospital disclosure reports demonstrate the arbitrary nature of the cost-allocation method. The Medicare medical education reimbursement was an average of $20,444 per resident. State and federal grants provided an average of $5,190 per resident. The Medicare payments and grants met an average of 35.7% of the education costs reported to Medicare. A joint-products cost analysis was used to estimate the pure cost of education in an 18-resident family practice residency. Replacing the residency with salaried physicians would have decreased the hospital's net return by $143,534. If neither grants nor Medicare education payments had been received, elimination of the program would have increased hospital net return by $428,083.     

Money for nothing?

One of the stages of medical training is the residency programme. Hosting institutions often claim compensation for the training provided. How much should this compensation be? According to our results, given the benefits arising from having residents among the house staff, no transfer (either tuition fee or subsidy) should be set to compensate the hosting institution for providing medical training. This paper quantifies the net costs of medical training, defined as the training costs over and above the wage paid. We jointly consider two effects. On the one hand, residents take extra time and resources from both the hosting institution and the supervisor. On the other hand, residents can be regarded as a less expensive substitute to nurses and/or graduate physicians, in the production of health care, both in primary care centres and hospitals. The net effect can be either positive or negative. We use the fact that residents, in Portugal, are centrally allocated to National Health Service hospitals to treat them as a fixed exogenous production factor. The data used comes from Portuguese hospitals and primary care centres. Cost function estimates point to a small negative marginal impact of residents on hospitals’ (?0.02%) and primary care centres’ (?0.9%) costs. Nonetheless, there is a positive relation between size and cost to the very large hospitals and primary care centres. Our approach to estimation of residents’ costs controls for other teaching activities hospitals might have (namely undergraduate Medical Schools). Overall, the net costs of medical training appear to be quite small.