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Hospital Responses to Lower Medicare Reimbursement

By March 31, 2014Commentary

The Medicare program has been under budgetary pressure for a long time, and we can expect that to grow worse.  How to respond to the growing spending on that program has been a matter of debate.  Potential alternatives to limit spending growth are to raise the age of eligibility, means-test the beneficiary cost-share, reduce benefits or reduce payments to providers.  Given that Congress is highly political, it is perhaps not surprising that the brunt of the measures taken to address the problem have fallen on providers, who have political clout, but not as much as the voting senior population.  The reform law in particular has scheduled relatively slow reimbursement growth for several years.  Research published in Health Services Research tries to analyze hospital responses to slower Medicare reimbursement growth.  (HSR Article)  Hospitals obviously could just eat the impact on their bottom lines, they could try to adjust service mix, the could try to compensate by charging other payers more, or they could try to reduce costs of providing service to Medicare beneficiaries, which might have impacts on quality.  And for-profit hospitals may react differently than not-for-profit.

The researchers analyzed hospital cost data provided to CMS over an extended period during which Medicare payments were steadily modified, primarily by reducing the growth that would otherwise occur.  The primary conclusion of the study was that over the time period hospitals experienced a real revenue loss of about $250 per admission or about 2.5% of their total revenues.  Hospitals, however, were variably affected, with teaching hospitals in urban areas seeing the largest revenue drops.  And hospitals with the lowest operating income to start with experienced greater reductions in operating income from the reimbursement reductions, indicating that the Medicare payment reforms actually increased the profit gaps among hospitals instead of leveling them.  A one dollar drop in Medicare revenue was on average associated with an $1.55 decrease in total revenues, demonstrating that not only was lost revenue not shifted to other payers; the prices paid by those insurers may also have been reduced, a negative spillover effect.

Ninety percent of this revenue reduction was offset over time by operating expense reductions, about three-fifths of which was accomplished by staff reductions.    The researchers also found that while not-for-profit hospitals largely lowered operating expenses over time to fully account for the revenue shortfall, thereby preserving margins; for-profit hospitals basically absorbed the lost revenue almost on a dollar-for-dollar basis as a hit to profits, which suggests that they likely already were running more efficiently in regard to operating expenses.  The authors estimate that the cumulative effect of the scheduled reform law reductions to Medicare hospital payments will be about $207 per admission, which would cause more hospitals to operate at a loss.

While it might be considered good news that most hospitals seem capable of lowering operating costs to match slower Medicare reimbursement growth, the effects on the quality of care are unknown, and the scope of reduced payments over the next few years is unprecedented, given that Medicare accounts for more of a hospital’s admissions now and that reimbursement increases have been muted for many years.  Similarly, the study’s finding that there currently appears to be little or no attempt to make up for lost Medicare revenue from private payers is small comfort since there is already a fairly wide price gap and most hospitals have a much larger margin on business from private health plans than on that from Medicare.

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