what happens to cost shifting when medicare reimbursement increase

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• Health Serv Res
• five.49(1); 2014 Feb
• PMC3922463

Health Serv Res. 2014 Feb; 49(1): 1–10.

The Stop of Hospital Toll Shifting and the Quest for Infirmary Productivity

Although perennially relevant, investigation of the consequence of Medicare hospital payment changes on hospital and health system performance has heightened salience today. The 2010 Patient Protection and Affordable Care Act (Public Constabulary 111–148; future, ACA) volition permanently reduce the Medicare payments hospitals would otherwise receive. Its "productivity adjustment" will scale payments downwards by the boilerplate rate at which private nonfarm businesses' productivity increases. That rate has been estimated to be 1.i percentage points per yr (Shatto and Clemens 2011), larger than historical, almanac hospital productivity gains (Cylus and Dickensheets 2007–2008). Unless hospitals become more than productive, they volition have to find other ways to handle lower growth in Medicare payments. How will the industry respond?

Some observers do not believe all hospitals will be able to fairly answer, or at least non in ways Congress will tolerate (Antos 2013). Actuaries for the Centers for Medicare and Medicaid Services (CMS) have estimated that by twelvemonth 2040, Medicare payment rates to hospitals will exist half those of the commercial market, and lower notwithstanding thereafter (Shatto and Clemens 2011). If such a large difference between Medicare and commercial market rates occurs, it may create access bug for Medicare beneficiaries, motivating Congress to moderate Medicare's hospital payment schedule (Newhouse 2010). A premise of this scenario, and of the CMS analysis (Shatto and Clemens 2011), is that hospitals will not alter private prices forth with Medicare's. Recent piece of work, including the article in this effect by Wu and White (2013), casts dubiousness on this premise.

Hospitals' Three Options

The literature explores three fundamental ways hospitals might answer to Medicare payment shortfalls. They are not mutually exclusive. One hypothesis is that hospitals will "shift costs" to other payers, that is, raise prices charged to private insurers in a (causal) response to Medicare payment shortfalls, offsetting them. If diverging Medicare and commercial market place prices pose an access problem, this would exacerbate it.

Cost shifting has been and continues to be a concern of the hospital and insurance industries. Claims of large rates of toll shifting that would bulldoze up premiums were made during the run-upwardly to passage of the ACA (Frakt 2011) and more recently (Green Mount Care Board 2013). Yet, nearly analysis that warns of big price shifts confuse (static) price discrimination from (dynamic) cost shifting does non consider the counterfactual that hospitals could enhance private prices commensurate with their market power in the absence of a Medicare payment shortfall, and/or presumes infirmary costs are immutable (Reinhardt 2011). Although there are circumstances under which hospitals could and did cost shift at high rates (due east.g., in the 1980s; see Cutler 1998), contempo work suggests that it is a far less pervasive and large phenomenon today than it might have in one case been (Frakt 2011).

Indeed, recent studies have found no evidence of cost shifting. In their assay of cost shifting, Dranove, Garthwaite, and Ody (2013) exploited the downward financial shock of the 2008 market plummet, arguing that hospitals would not differentiate between loss of endowment revenue and a reduction in resource from a public payer. The authors plant no evidence of cost shifting by hospitals, on average. However, a subset of high-quality hospitals (<10 per centum of the total treating <20 percent of all patients) did raise private payer prices, exploiting previously untapped market power.

Exploiting exogenous changes in Medicare hospital payment policy from 1995 to 2009, White (2013) found that a 10 percent reduction in the Medicare payment rate was associated with a 7.73 per centum reduction in the individual rate. This price spillover is the antonym of price shifting. Finally, He and Mellor (2012) also constitute bear witness consistent with spillovers. In their assay of outpatient surgical procedures at Florida hospitals during 1997–2008, they institute that Medicare charge per unit cuts were associated with an increase in book from private insurers that paid fee-for-service prices. This volume shifting is inconsistent with cost shifting and is expected to accompany price spillovers. It suggests hospitals reduce private prices (though still continue them above Medicare rates) in response to lower Medicare ones to attract a larger volume of college paying patients (Morrisey 1994).

Thus, cost shifting past hospitals now appears to be largely infeasible. Today'southward insurers may possess market power that offsets that hospitals might otherwise exploit to raise prices. Put another way, hospitals may have already exploited their market ability and lack farther leverage to heighten individual prices. In lite of the evidence, any continued assumptions that most or all of the shortfalls in Medicare rates can be shifted to private payers (PWC [Cost Waterhouse Coopers] 2009; Dobson et al. 2009) should be relegated to the dustbin of history.

A 2d mode hospitals might respond to shortfalls in Medicare payments is by cut, rather than shifting, costs. Considering hospital operations are typically consistent beyond publicly and privately insured patients, price cutting due to shortfalls in Medicare revenue could take a spillover effect, leading to lower private prices (White 2013). Dranove, Garthwaite, and Ody (2013) found evidence of cost cutting in response to the 2008 market collapse. Hospitals reduced spending on advanced medical records and stopped offering unprofitable services like those available at trauma centers and substance utilise treatment facilities.

Cost cutting raises the concern that what is cutting will harm patient care. For example, if they cutting nursing staff, will the hospitals deliver the same quality of care (Needleman et al. 2011)? The cuts in advanced medical records, trauma centers, and substance utilize treatment facilities found by Dranove, Garthwaite, and Ody (2013) could be reductions in quality. So, though hospitals may not cost shift, it is not necessarily incorrect to presume that patient welfare could be affected past reduced revenue.

A third possibility is that hospitals will respond to revenue shortfalls with a reduction in overall profit margins. Loss of profitability increases the possibility of closures, mergers, and acquisitions (Sloan, Ostermann, and Conover 2003). These could ultimately affect patient intendance and private prices to the extent that markets lose hospitals and through consolidation that concentrates market power in fewer hospitals (Gaynor and Boondocks 2012).

Wu and White

The article in this issue by Wu and White (2013) is a timely and rigorous analysis of hospitals' long-run response to changes in Medicare payments for inpatient services. Complementing their prior work (Wu 2010; White 2013), Wu and White (2013) largely focused on infirmary cost cutting and profit loss in response to Medicare payment shortfalls.

Exploiting exogenous changes in Medicare hospital payment policy, as each author did in earlier work (Wu 2010; White 2013), the authors examined their effect on infirmary total revenue, operating expenses, profits, avails, and staffing over the years 1996–2009. Their findings are inconsistent with cost shifting: a $one reduction in Medicare inpatient revenue is associated with an fifty-fifty larger reduction ($1.55) in total revenue, consistent with price spillovers (White 2013). In part, this undermines the assumptions of CMS actuaries discussed above (Shatto and Clemens 2011). If changes in private prices mirror those of Medicare, divergence between the two sets of prices develops more slowly.

Wu and White found that nearly all of the reduction in total revenue (90 percent) was offset past lower operating expenses. Of that, nearly 60 percent was in personnel, and the remaining was in non-personnel expenses. Reduced Medicare payments did not result in statistically pregnant reductions in profits amid not-for-profit hospitals, because they fully kickoff lost revenues with reduced operating expenses. Notwithstanding, for-profit hospitals offset near all of Medicare inpatient revenue reductions with lower profit, suggesting they were operating closer to minimum cost than non-for-profit hospitals. Hospitals that lost Medicare revenue over the menses of report outset 12 per centum of full revenue losses with reduced profit, simply hospitals that gained Medicare acquirement over the period of study retained almost xxx per centum of full revenue gains in profit. This highlights an asymmetry in favor of profit protection: When hospitals lose revenue, they offset most of it by cutting costs. When they gain revenue, relatively more of it is absorbed every bit profit.

Turning to implications of the ACA, Wu and White imitation the effect of the annual ane.1 percent productivity adjustments over ten years. The strength of this simulation is that magnitudes are similar to those observed in their sample. They estimated that the productivity adjustments would result in a reduction in hospital acquirement of $207 per belch equivalent (DCEQ, a measure out that accounts for infirmary outpatient as well every bit inpatient services), close in magnitude to the reduction observed in their data over 1996–2009. The resulting loss of profits, nearly $30 per DCEQ, implies an increase in hospitals operating at a loss of xv percent points. This is consistent with the concern expressed by Richard Foster, the former Main Actuary of Medicare, that 15 percent of hospitals would become unprofitable in 10 years (Foster 2011).

Cutting Fatty or Muscle?

When hospitals cutting costs, do they cut fatty or muscle? That is, do they cut unimportant amenities and waste (fat), making themselves more efficient at converting resources to wellness? Or exercise they trim services in such a way that harms care (muscle)? Put some other way, to what extent tin can hospitals become more productive at converting resource to health?

Contempo literature on this question suggests hospitals cutting some muscle when they cutting costs. Wu and Shen (2011) institute that hospitals that faced large payment cuts from the 1997 Counterbalanced Upkeep Act (Public Constabulary 105-33; futurity BBA) cut operating costs and staff and experienced increased mortality rates of heart assault patients relative to those seen at hospitals that faced smaller cuts. They calculated that a 1 percent cutting in payment results in a 0.4 percent increment in centre attack mortality rates. Using Medicare data from 1997, 2001, and 2005, Lindrooth et al. (2013) establish that decreases in hospital service line Medicare profitability was associated with an increase in risk-adapted thirty-twenty-four hour period mortality and the relationship was stronger for unprofitable services than profitable ones. They concluded that payment policies that were more sensitive to the distribution of profitability beyond services could lead to up to 13,000 fewer deaths per yr.

These studies suggest that hospitals that cut costs in response to Medicare payment shortfalls are unable to do then in productivity enhancing ways. This is illustrated in Effigy1, which shows 2 hypothetical hospital production functions relating health intendance inputs (spending) to health outcomes (like mortality) (Chandra, Jena, and Skinner 2011). Consider a hospital operating at indicate A on bend 1 (the lower curve) that is so faced with a cutting in inputs (Medicare payment reductions). If the hospital is unable to change its product function, it tin only move forth curve 1. If it and so addresses the shortfall by cutting costs, it necessarily leads to worse outcomes (higher bloodshed): signal B on curve 1. Because B is on the aforementioned production part as A, the infirmary has not become more productive in converting spending to health.

Movements of and along Hospital Production Functions

1. Notes. Shifting the hospital input-outcome operating signal from A to B is a large, downward move forth a hospital production function. As the production function has not shifted, it does not represent a alter in productivity. It is associated with a big decrease in spending and a substantial worsening of outcomes. Shfting from A to C is an upwardly shift in production function (curve 1 to curve 2)—an increase in productivity—forth with a pocket-sized downward movement along information technology. The issue is a minor decrease in spending and a small improvement in outcomes. Shfting from A to D is also an increase in productivity, merely combined with a large, downward move along the production function. It is a trade-off of a large reduction in spending for a pocket-sized degredation of outcomes

.

Lindrooth et al.'southward (2013) simulation of a more than targeted reform that cuts Medicare payment without increasing bloodshed as much suggests cost cutting need not be and then detrimental to health outcomes. Analysis of Bluish Cross Blue Shield of Massachusetts' Alternative Quality Contract (AQC) does as well (Song et al. 2011, 2012). The AQC, which incorporates global budget and pay-for-functioning principles, began in 2009 with 7 doc organizations in Massachusetts and had fifteen participating groups by 2012 (Song et al. 2013). Investigators found that the AQC was associated with spending reductions of ane.9 and 3.iii percent in its first and second years, respectively, along with prove of improvements in quality. Although not a hospital-specific payment innovation, the AQC is evocative of the type of productivity gains one might hope hospitals would accomplish with like incentives called for by the ACA, such every bit accountable care organizations (ACOs) and arranged payments (Frakt and Mayes 2012). Early evidence is encouraging that ACOs can amend quality without increasing costs to Medicare (Gilded 2013). However, the implications of ACOs and the consolidation they encourage on private prices take not still been direct assessed (Frakt, Pizer, and Feldman 2013).

Returning to Effigy1, reductions in cost and improvements in quality such as those achieved by the AQC are consequent with a motility from betoken A on bend 1 to signal C on curve ii. In other words, they are a combination of an upwardly shift in the productivity function and a downward motion along it. The former is a productivity enhancement. The latter is a trade of lower spending for poorer outcomes, holding the production part fixed.

The ACA includes both a edgeless Medicare payment cut (the predicted i.i percent annual productivity adjustment) and designs for incentives for higher quality and better outcomes (like ACOs). Testify suggests the quondam is not productivity enhancing, but promise remains that the latter may be. A key question is how the 2 work together. Will they move a hospital from bespeak A to betoken B (lower spending with much worse outcomes) or C (lower spending with amend outcomes)? Another possibility is a trade-off of substantially lower spending (relative to trend) for somewhat poorer outcomes, like point D.

Such a trade-off calls to heed what Mark Pauly expressed in a 2011 paper in Wellness Affairs, "Perhaps a trivial less quality for a lot less money might be acceptable to consumers and taxpayers, as nosotros work to go on medical spending from siphoning off funds required for other needs" (Pauly 2011). Whether it is acceptable or non, it may be what consumers and taxpayers get.

Conclusion

It is not a foregone conclusion that our health system may endure worse outcomes every bit we moderate health spending. Policies in place or new ones could put enough accent on productivity enhancements to avoid that issue. Comparative effectiveness research holds neat promise in this regard (Frakt and Carroll 2013), provided payers are able to put in place and sustain value-based incentives to discourage apply of technologies and services identified equally low value and encourage ones of loftier value (Chernew, Rosen, and Fendrick 2007; Pearson and Bach 2010; Thomson, Schang, and Chernew 2013).

A fundamental truth is that we do not withal know how to reliably drive the system toward college productivity or whether existing, promising models can be generalized (Frakt and Mayes 2012). Nevertheless, as encouraged by the ACA and through private-sector initiatives like the AQC, the hope is that new, successful models will emerge.

Meanwhile, another fundamental truth has emerged from the literature: As public payments to hospitals are moderated, individual ones do non increment. The era of hospital cost shifting appears to be over. Chapin White wrote, "My hope is that the dynamic cost-shifting theory is hereby put to remainder" (White 2013). In low-cal of recent work, including that of Wu and White (2013), information technology is my conclusion that, for now, information technology has been.

Acknowledgments

Acquittance/Disclosure Argument: The views expressed are those of the writer and exercise not necessarily reflect the position or policy of the Department of Veterans Diplomacy, Boston University, or the University of Pennsylvania. I thank Jonathan Skinner for his helpful comments on an earlier draft.

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Source: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3922463/

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