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.     

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).     

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.     

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.     

Are rural referral centers as costly as urban hospitals?

This article evaluates the claim that rural referral centers (RRCs), identified by HCFA criteria for special treatment under Medicare's prospective payment system, have average costs similar to urban hospitals. Multivariate analysis led us to conclude that RRC Medicare costs were 13 percent higher than those of other rural hospitals in 1984, holding constant Medicare case mix, teaching activity, and relative wages. However, RRCs were 9 percent ($200) less costly per case than urban hospitals. Outliers explained most of the cost difference between RRCs and urban hospitals, while transfers were more important in explaining differences between RRCs and other rural hospitals. Given that bed size alone explained all of the RRC-other rural cost difference, paying RRCs the urban rate results in an indirect way of paying them based on bed size. It also gives them an average excess of payment over Medicare cost well above the national rural and urban average.     

The impact of graduate medical education on teaching hospital efficiency

This quantitative research study assesses the efficiency of university teaching hospitals in providing hospital services and graduate medical education, identifying areas in which inefficient teaching hospitals differed from their efficient counterparts. The study analyzed American Hospital Association (AHA) data from 2002 in order to examine the efficiency of Council of Teaching Hospital (COTH) hospitals. An efficiency frontier was determined using Data Envelopment Analysis, an effective method of measuring efficiency widely accepted within the health care management literature. The study found that the performance of teaching hospitals increased approximately 6.6 percent when graduate medical education (GME) was included as a key measure of output. Additionally, average excess operating expenses per hospital went from $29,447,581 without residents to $8,321,407 with residents. The average excess full-time employees decreased by 24 percent from 187 without residents to 143 with residents. Conversely, the shortage of outpatient visits increased from an average of 29,461 per hospital without residents to 36,155 with residents. This study clearly documents the need to include GME when benchmarking teaching hospitals. It also shows inefficient COTH hospitals could save approximately $1.6 billion in excess overhead expenses if they emulate the practices of the most efficient members.     

Hospital cost shifting revisited: new evidence from the balanced budget act of 1997

This paper analyzes hospital cost shifting using a natural experiment generated by the Balanced Budget Act (BBA) of 1997. I find evidence that urban hospitals were able to shift part of the burden of Medicare payment reduction onto private payers. However, the overall estimated degree of cost shifting is small and varies according to a hospital’s share of private patients. At hospitals where Medicare is a small payer relative to private insurers, up to 37% of BBA cuts was transferred to private payers through higher payments. In contrast, hospitals with greater reliance on Medicare were more financially distressed, as these hospitals saw large BBA cuts but were limited in their abilities to cost shift.     

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.     

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.     

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.     

Why did Medicare spending growth slow down?

So-called excess growth in Medicare spending per beneficiary has varied widely and has slowed in recent years. The annual rate of excess growth fell from 5.6 percent during 1975-1983, to 2.1 percent during 1983-1997, to only 0.5 percent during 1997-2005. Changes in payment policies and regulations can help explain the observed slowdown. These include new prospective payment systems for hospitals and postacute care providers, and controls on aggregate Medicare physician spending. Competing explanations-increases in managed care enrollment, changes in Medicare cost sharing, and a systemwide spending slowdown-do not account for the slowdown.     

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.     

Hospitalization of nursing home residents: the effects of states' Medicaid payment and bed-hold policies

OBJECTIVE: Hospitalizations of nursing home residents are costly and expose residents to iatrogenic disease and social and psychological harm. Economic constraints imposed by payers of care, predominantly Medicaid policies, are hypothesized to impact hospitalizations. DATA SOURCES/STUDY SETTING: Federally mandated resident assessments were merged with Medicare claims and eligibility files to determine hospitalizations and death within 150 days of baseline assessment. Nursing home and market characteristics were obtained from the Online Survey Certification and Reporting, and the Area Resource File, respectively. States' average daily Medicaid nursing home payments and bed-hold policies were obtained independently. STUDY DESIGN: Prospective cohort study of 570,614 older (> or =65-year-old), non-MCO (Medicare Managed Care), long-stay (> or =90 days) residents in 8,997 urban, freestanding nursing homes assessed between April and June 2000, using multilevel models to test the impact of state policies on hospitalizations controlling for resident, nursing home, and market characteristics. PRINCIPAL FINDINGS: Overall, 99,379 (17.4 percent) residents were hospitalized with rates varying from 8.4 percent in Utah to 24.9 percent in Louisiana. Higher Medicaid per diem was associated with lower odds of hospitalizations (5 percent lower for each $10 above average $103.5, confidence intervals [CI] 0.91-0.99). Hospitalization odds were higher by 36 percent in states with bed-hold policies (CI: 1.12-1.63). CONCLUSIONS: State Medicaid bed-hold policy and per-diem payment have important implications for nursing home hospitalizations, which are predominantly financed by Medicare. This study emphasizes the importance of properly aligning state Medicaid and federal Medicare policies in regards to the subsidy of acute, maintenance, and preventive care in the nursing home setting.     

The Effect of Cuts in Medicare Reimbursement on Hospital Mortality

Objective. To determine if patients treated at hospitals under different levels of financial strain from the Balanced Budget Act (BBA) of 1997 had differential changes in 30-day mortality, and whether vulnerable patient populations such as the uninsured were disproportionately affected.
Data Source. Hospital discharge data from all general acute care hospitals in Pennsylvania from 1997 to 2001.
Study Design. A multivariate regression analysis was performed retrospectively on 30-day mortality rates, using hospital discharge data, hospital financial data, and death certificate information from Pennsylvania.
Data Collection. We used 370,017 hospital episodes with one of four conditions identified by the Agency for Healthcare Research and Quality as inpatient quality indicators were extracted.
Principal Findings. The average magnitude of Medicare payment reduction on overall net revenues was estimated at 1.8 percent for hospitals with low BBA impact and 3.6 percent for hospitals with a high impact in 1998, worsening to 2 and 4.8 percent, respectively, by 2001. Operating margins decreased significantly over the time period for all hospitals ( p <.05). While unadjusted mortality rates demonstrated a disproportionate rise in mortality for patients from high impact hospitals from 1997 to 2000, adjusted analyses show no consistent, significant difference in the rate of change in mortality between high-impact and low-impact hospitals ( p =.04–.94). Similarly, uninsured patients did not experience greater increases in mortality in high-impact hospitals relative to low-impact hospitals.
Conclusions. An analysis of hospitalizations in the Commonwealth of Pennsylvania did not find an adverse impact of increased financial strain from the BBA on patient mortality either among all patients or among the uninsured.     

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.     

National health projections through 2008

Health spending is expected to resume its rise as a share of gross domestic product (GDP) in the projection period, following 6 years of near stability, increasing from 13.5 percent in 1997 to an estimated 16.2 percent by 2008. This implies an approximate doubling of health spending, from $1.1 trillion in 1997 to $2.2 trillion by 2008. We anticipate a reversal in recent patterns of growth in public and private health spending, with private spending expected to accelerate while Medicare spending slows in response to the implementation of the Balanced Budget Act (BBA) of 1997.     

Organizational Characteristics and Cancer Care for Nursing Home Residents

Objective. We evaluate whether organization, market, policy, and resident characteristics are related to cancer care processes and outcomes for dually eligible residents of Michigan nursing homes who entered facilities without a cancer diagnosis but subsequently developed the disease. Data Sources/Study Design/Data Collection. Using data from the Michigan Tumor Registry (1997–2000), Medicare claims, Medicaid cost reports, and the Area Resource File, we estimate logistic regression models of diagnosis at or during the month of death and receipt of pain medication during the month of or month after diagnosis. Principal Findings. Approximately 25 percent of the residents were diagnosed at or near death. Only 61 percent of residents diagnosed with late or unstaged cancer received pain medication during the diagnosis month or the following month. Residents in nursing homes with lower staffing and in counties with fewer hospital beds were more likely to be diagnosed at death. After the Balanced Budget Act (BBA), residents were more likely to be diagnosed at death. Conclusions. Nursing home characteristics and community resources are significantly related to the cancer care residents receive. The BBA was associated with an increased likelihood of later diagnosis of cancer.     

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.     

Do financial incentives matter? Effects of Medicare price shocks on skilled nursing facility care

Skilled nursing facility (SNF) spending has been one of the fastest growing categories of Medicare spending over the past few decades, and reductions in SNF payments are often recommended as part of Medicare cost containment efforts. Using a quasi‐experiment resulting from a policy‐driven and facility‐specific Medicare payment change, we provide new evidence on how Medicare payment changes affect the amount of SNF care provided to Medicare patients. Specifically, we examine a one‐time, plausibly exogenous change in the hospital wage index, an area‐level adjustment to SNF payments that affected the majority of SNFs nationwide. Using a panel dataset of SNFs, we model the effects of these payment changes on more than 12,000 SNFs across the United States. We find that increases in Medicare payment rates to SNFs increased the total number of Medicare resident days at SNFs. Specifically, a 5% payment increase raised Medicare resident days by 2.33% at facilities with a 10% Medicare share relative to 0%. Further, the effects were asymmetric: Although Medicare payment increases affected Medicare days, payment decreases did not. Our results have important implications for policies that alter the Medicare base payment rates to SNFs and other health care providers.     

Paying for graduate medical education: the debate goes on

The debate over Medicare payments for graduate medical education has been conducted under the premise that such payments cover the added costs of training. Standard economic theory suggests that residents bear the costs of their training, implying that the additional costs of teaching hospitals are not attributable to training per se but to some combination of a different patient care product, unmeasured case-mix differences, and the costs of clinical research. As a result, payment for the additional patient care costs at teaching hospitals should come from the Medicare trust fund; any subsidies for training should come from general revenues.