Payment Reform and Market Competitiveness

Medicare, Medicaid and private insurers have all been experimenting with and implementing a number of provider reimbursement models.  The goal is usually to reduce spending, while also potentially improving outcomes.   A study in the Journal of Health Economics examines whether the effect of a reimbursement change may depend on how competitive a provider market is.   (JHE Article)   It would stand to reason that in a negotiated-price market, more competition means lower prices and also likely means that providers in competitive markets have to work harder to keep their operating costs low.  Under cost-based reimbursement systems, in less competitive markets providers may get paid more by not managing their costs closely and even in competitive markets providers may have little incentive to control their expenses.  In addition, providers have an incentive to do as many visits as possible and that incentive may actually be greater in competitive markets, where there is more of a scramble to gather whatever profits can be found. The researchers used a shift by Medicare in how it reimbursed home health agencies as a test for the interplay between payment method and market competitiveness.  Medicare went from cost-based reimbursement to a prospective-type system in 1997.  The cost-based system obviously led to high utilization and a high number of visits per beneficiary.  When payment was reduced, utilization and visits per patient dropped significantly.

The most competitive markets tended to be urban, to have a higher number of for-profit home health agencies and to have higher intensity of care.  The markets in the top quartile for competitiveness did in fact, and somewhat counter-intuitively, have the highest costs and the most visit-days before the payment change.  Shows the warped incentive of cost-based reimbursement.  After the payment change these markets also experienced the greatest drop in days and costs.  There was little effect on mortality or readmissions, suggesting that all those extra visits and costs did nothing to improve patient outcomes.  The most competitive markets also experienced a greater exit of home health agencies after the change, an indication that high-cost, marginally efficient providers exited the market, apparently unable to find a way to get their costs under control.  The overall effect is to eliminate high-cost agencies, which also had the effect of lowering geographic variation in home health spending and utilization.  Studies like this show why Medicare and other payers very seldom use cost-based payment today; it has pernicious spending effects with no quality benefits.