Hospital Responses to Medicare Reimbursement Cuts

While it is hard to feel sorry for hospitals since they appear to be a major cause of excessive spending growth, they have a significant dependence on Medicare, which has been a difficult and probably inadequate payer.  Not only has reimbursement growth been slow to non-existent, but a variety of programs can reduce those payments, such as the readmission penalties and value-based purchasing.  Research published in Health Services Research examines how hospitals have coped with Medicare reimbursement issues.   (HSR Article)   Medicare is a major revenue source for the typical hospital, so reimbursement growth that does not keep up with cost of care growth means a hospital must cut those costs or find more revenue from other payers.          The study covered 1996 through 2009 and looked at a variety of hospital types to ascertain responses to persistently below-inflation Medicare reimbursement growth.  Most hospitals experienced a decline in reimbursement in real terms over this period, although the amount of decline varied substantially.  Rural hospitals were the least affected, probably because they have a different reimbursement formula.  It also appears that most hospitals did not make up for Medicare revenue shortfalls by charging more to other payers. In fact a one dollar reduction in Medicare revenues was associated with a $1.55 reduction in overall patient revenues.  Of that reduction in patient revenues, about $1.40 is compensated for by operating expense reductions.  Three-fifths of that is personnel cost cuts.  For-profit hospitals cut expenses more aggressively, but still took a bigger hit to profits than did non-profits.  The authors project that the continuing reductions in reimbursement growth from the reform law will lead to substantial cost-cutting by hospitals, with possible implications for quality.  Anecdotal evidence may support the authors’ conclusions, as there are currently many stories about hospitals laying off staff in response to payment pressures.