When Medicare Squeezes Payments, Hospitals Cut Costs Instead of Shifting Costs

Contrary to Conventional Cost-Shifting Wisdom, Health Services Research Study Indicates Hospitals ‘Tighten, or Loosen, Their Belts As Needed’ to Respond to Medicare Payment Changes

Media Advisory
Oct. 8, 2013

Alwyn Cassil (202) 264-3484 or [email protected]

WASHINGTON , DC—Contrary to the popular belief that hospitals shift costs to private payers when Medicare squeezes payments, hospitals instead cut operating costs to adjust to reduced revenues, according to a study by the Center for Studying Health System Change (HSC) published online in the journal Health Services Research.

The 2010 Affordable Care Act (ACA) permanently slows the growth of Medicare payment rates for inpatient hospital care, raising concerns that hospitals will raise prices for private payers to offset lower Medicare revenue.

If history holds true, however, nonprofit hospitals will instead reduce operating expenses to maintain profits, while for-profit hospitals, which tend to already have lower operating costs, will see profits decline, according to the study by HSC Senior Researcher Chapin White, Ph.D.; and Vivian Yaling Wu, Ph.D., an assistant professor at the University of Southern California.

Funded by the nonprofit, nonpartisan National Institute for Health Care Reform, the study analyzed Medicare cost reports for 2,043 hospitals between 1996 and 2009 and examined the effect of changes in Medicare inpatient payments on hospital s’ overall revenues, operating costs, profits, assets and staffing.

“These findings are mixed news for supporters of the ACA. From a financial standpoint, the ACA cuts clearly will help bend the hospital spending curve downward, both for Medicare and for other payers as well. The claim that large numbers of hospitals will be driven to insolvency by the ACA cuts appears to hold true only for for-profit hospitals—not-for-profit hospitals, over the period examined, fully adjusted their operating expenses to match their newly constrained revenues. Hospitals’ operations will clearly have to adjust in coming years to a more constrained revenue environment. If hospitals can manage to maintain or improve their quality of care, then the result will be improved efficiency,” the study concludes.

The study, titled “How Do Hospitals Cope with Sustained Slow Growth in Medicare Prices?” is available online here.

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The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely research on the nation's changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is affiliated with Mathematica Policy Research.