Medicare Cuts: Hospitals Don’t Make It Up on Volume

October 31, 2013
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Medicare costs and the ACAThe Affordable Care Act purports to reduce the deficit, yet critics expect (or at least claim to expect) that it will actually be a budget buster. A Health Affairs article (When Medicare Cuts Hospital Prices, Seniors Use Less Inpatient Care) comes down on the side of those expecting big savings.

Medicare costs and the ACAThe Affordable Care Act purports to reduce the deficit, yet critics expect (or at least claim to expect) that it will actually be a budget buster. A Health Affairs article (When Medicare Cuts Hospital Prices, Seniors Use Less Inpatient Care) comes down on the side of those expecting big savings. The researchers, Chapin White of the Center for Studying Health System Change and Tracy Yee of Truven Health Analytics study the historical relationship between Medicare price trends and the volume of inpatient care provided.

The Affordable Care Act cuts Medicare price growth. But if hospitals respond by increasing the amount of care provided – by treating patients more intensely or hospitalizing more of them – the potential cost savings from price restraint may be lost. And if they raise prices in the commercial market the burden will simply shift from the public to the private sector.

Here’s what the authors found:

Our analysis revealed an important relationship between Medicare prices and the volume of inpatient services. Although some analysts worry that price cuts will lead hospitals to “make it up on volume,” our results suggest the opposite:Medicare price cuts lead to a reduction in volume…

Medicare price cuts lead hospitals to reduce capacity and provide fewer services to the elderly. Hospitals do not appear to leave beds empty in response to Medicare price cuts. Instead, they appear to reduce their scale of operations by shutting down beds…

Hospital volume responses might not even reflect conscious decisions. Instead, they may occur gradually, through evolving clinical norms.

If historical patterns hold true, that means the Affordable Care Act will save more on hospital costs than projected. In addition, it turns out that hospitals generally are not able to get commercial payers to make up for lost Medicare revenues. Instead, lower Medicare prices are associated with lower commercial rates. That’s probably because private health plans use Medicare rates as the baseline for negotiation.

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There are a couple things that are different this time around: the emphasis on measuring and paying for quality and the emergence of risk-based payment models such as Accountable Care Organizations. If anything, the price pressures from traditional fee-for-service may encourage a more rapid shift toward the new models as providers look for ways to avoid the unit price squeeze. That’s a good thing as long as ACOs realize at least some of their potential.

Like all good researchers, these authors conclude with a call for further research, so we should expect to read more on this front in the future!

(Medicare / shutterstock)