It has long been claimed that if public payers, Medicaid and Medicare, use their fiat power to limit reimbursements to providers, the providers will seek to make this up in higher charges to private health plans. The evidence is unclear on how much this actually happens. A new National Bureau of Economic Research paper takes a new look. (NBER Paper) The authors attempted to address the problem by looking for any relationship between the consequences to a hospital under Medicare’s readmission reduction program and/or the value-based purchasing initiative and subsequent price changes between the hospitals and private plans. Economic theory could predict two opposite reactions to a reduction in public reimbursement; in one theory, hospitals would actually reduce their prices to private payers to attract more patients (not sure what universe that would happen in); and in another theory, they will try to increase prices to recapture lost revenue and margin. The researchers used actual hospital payment data from the Health Care Cost Institute and Medicare data on the penalties hospitals received under the CMS initiatives. They compared changes in payments to hospitals following the institution of the CMS initiatives.
At a high level, they found that hospitals who were penalized received an increase in average private plan payments that was 1.5% higher than the increase attributed to hospitals that were not penalized. In addition, penalized hospitals reduced Medicare admissions, while those that were not penalized showed no significant reduction. The net result suggests that for every $1 penalty, hospitals recover about 56 cents from private payers. This seems pretty rational to me, and I suspect hospitals would capture even more of the lost revenue if they could, and even at 56 cents on the dollar they are certainly recovering a fair amount of the lost margin. Hospitals, like most entities, whether they are for or non-profit, want to at least maintain revenues and margins. Lost revenue dollars, even assuming flat costs, come directly out of margins. Most hospitals aren’t making a lot of money on Medicare to begin with, so when they lose revenue, they are probably coming close to a loss on those patients. Conversely, if they increase what they charge a private plan, there is no underlying increase in costs so that is all margin gain. If they could, I am sure the hospitals that are penalized would try to get at least 100% of the lost margin back from private payers. And in fact, the analysis in this paper finds greater cost-shifting by hospitals with more market power.