Medicare Price Cuts May Slow Total Overall Hospital Spending Growth

Pathologists and clinical laboratory managers will want to stay abreast of what emerging data is revealing about the broader impact of slowed growth in Medicare spending

Contrary to the predictions of some analysts, a recent study suggests that slowing Medicare price growth by lowering hospital reimbursements will slow hospital utilization and spending for all age groups. For pathologists and clinical laboratory managers, the study represents credible evidence that cuts in Medicare prices cause a measurable and linked decrease in hospital utilization for both the elderly and the non-elderly.

The Affordable Care Act of 2010 (ACA) permanently suppressed the rate of growth in Medicare reimbursements to hospitals and most other medical providers, according to a recent study by the Center for Studying Health System Change (HSC). In this study, the HSC sought to measure spillover effects of changes in Medicare inpatient hospital prices on patients under age 65.

“Analyses of the effects of the ACA have generally ignored possible effects on utilization rates among the elderly and nonelderly,” observed first study author Chapin White, Ph.D. in a paper published online in the journal Health Services Research. White is currently a Senior Policy Researcher with the Santa Monica, California-based RAND Corporation. He conducted the study for the nonpartisan, nonprofit National Institute for Health Care Reform (NIHCR) during his tenure as a Senior Researcher at HSC.

“[The study] provides a preview…of the possible effects of the [ACA-mandated] Medicare price cuts,” wrote White.

History Links Generous Medicare Payment with Spillover Increases in Spending and Utilization among the Nonelderly

During the 1960s and 1970s, Medicare paid hospitals very generously, noted White. “[T]he implementation of Medicare spurred spillover increases in spending and utilization among the nonelderly.” This is significant because Medicare is by far the single most important payer in the hospital sector. It accounts for roughly 30% of total hospital revenues.

Study Shows Medicare Price Cuts Will Lead to Real Savings, not Mere Cost-shifting

Some healthcare analysts have predicted that efforts to reduce healthcare spending in one area would simply shift those costs elsewhere. Like squeezing a balloon, they maintained, it simply forces the air to bulge somewhere else.

These analysts based their reasoning in part on historical patterns of provider response to price cuts. For example, providers could respond to cuts by increasing volumes or by “cost-shifting.” They warned that these provider responses would negate projected Medicare savings.

The study, however, indicated that Medicare cuts will create real spillover savings.

Hospital Capacity and Physician Pattern of Practice Have Spillover Effects that Impact Spending

For the study, White analyzed hospital discharge data from 1995 to 2009. He drew data from 116 metropolitan statistical areas (MSAs). The MSAs were in 10 geographically diverse states. In 2000, these MSAs represented roughly one-third of the U.S. population. It included 97 million residents. Of those, roughly 87% were nonelderly.

White found that when Medicare tightens hospital payments for inpatient care, hospitals scale back overall capacity. The result: less hospital use by both elderly and nonelderly patients.

Another important spillover effect comes from physician practice patterns, according to the study. “Health economists believe that providers, such as physicians and hospitals, typically adopt a single practice style to treat all patients,” stated Lauren Hersch Nicholas, Ph. D., in a story published by the SeniorJournal.com. Nicholas is Assistant Professor at the Johns Hopkins School of Public Health. She was not involved in this study.

Examples of elements of physician practice styles that impact cost include:

• intensity of treatment, such as the length of inpatient stay and number of procedures performed, and
• choice of treatment modality, such as surgery versus medical management.

“[I]f Medicare price cuts lead hospitals to provide less-intensive services to Medicare patients, we might expect a similar change in treatment patterns among non-Medicare patients,” wrote White. “Our results suggest that the tightening of Medicare payment policy can have spillover effects that help slow utilization and spending growth broadly.”

Projecting forward, White expects the Medicare provisions in the ACA to slow the growth in hospital spending. He believes this will happen to a larger degree than has been projected by the Congressional Budget Office and others. “A 10% reduction in the Medicare price is estimated to reduce discharges among the nonelderly by about 5%,” he stated in the study.

Spillover Effects Are Important

How these spillover effects impact the health system is important, White observed. For one thing, they exemplify the way that changes in Medicare prices can affect the health system broadly. Further, according to Nicholas, benefits of these policies may include reductions in insurance premiums and out-of-pocket healthcare spending for nonelderly, working-age populations.

Pathologists and clinical laboratory managers will see this study as further evidence of the approaching end of the hospital-centric healthcare model. The role of hospitals and other providers, including medical laboratories, will continue to shift toward delivering value-based quality care.

—Pamela Scherer McLeod

Related Information:

Cutting Medicare Hospital Prices Leads to a Spillover Reduction in Hospital Discharges for the Nonelderly

When Medicare Squeezes Payments, Hospital Use Declines for Nonelderly, Too Health Services Research Study: Spillover Effects from Accountable Care Act (ACA) Medicare Payment Reductions Likely to Slow Inpatient Hospital Spending More Broadly Than Predicted

Dark Daily, “Falling Inpatient Revenues at Many Hospitals Is Sign of Healthcare’s Transition to New Models of Integrated Clinical Care and Changes in Medical Laboratory Test Utilization”