The researchers examined how a change in the payment rate for Medicare inpatient hospital services affects the volume of those services. They used the Healthcare Cost and Utilization Project’s State Inpatient Databases for 1995-2009 to perform a panel data regression analysis of volume on payment rates, controlling for area- and year-fixed effects, and to the extent possible, beneficiary health status. In addition, they analyzed whether the volume of inpatient hospital services responds asymmetrically to increases versus decreases in Medicare payment generosity, and whether volume changes are more likely for some diagnoses than others. The goal of this project was to provide the Congressional Budget Office and other policy analysts with estimates of how changes in Medicare hospital payment rates affect the volume of Medicare admissions, a critical, yet not well-studied piece of evidence used in modeling Medicare policy options.
Policy Summary: Historically, when faced with pressure to rein in Medicare spending, Congress has cut the prices paid to medical providers. The Affordable Care Act of 2010 (ACA), for example, permanently slows the growth in Medicare prices for hospitals and most other providers. Some policymakers have questioned whether such cuts actually reduce Medicare spending, arguing that providers make up for lost revenues by increasing the volume of services provided.
Our study measures the effects of market-level changes in Medicare payment rates on the volume of inpatient hospital services provided to the elderly. Medicare prices for inpatient hospital care are measured using Medicare hospital cost reports, and the volume of inpatient care is measured using the Healthcare Cost and Utilization Project State Inpatient Databases (HCUP-SID) for ten selected states (Arizona, California, Colorado, Florida, Iowa, Massachusetts, New Jersey, New York, Washington, and Wisconsin).
We find that inpatient utilization trends were lower in markets where Medicare prices grew relatively slowly. This implies that tight constraints on Medicare inpatient prices lead seniors to use less inpatient care. These results clearly contradict the notion that hospitals facing Medicare inpatient price cuts will make up for price cuts by increasing inpatient volume. Our results indicate, instead, that Medicare savings from the price cuts in the Affordable Care Act may be larger than the direct effects because of a sizeable volume response. And, conversely, if the Medicare provisions in the Affordable Care Act are repealed, Medicare spending might increase by more than projected.
The mechanisms by which inpatient volume adjusts are not yet clear. But, it is important to note that wide geographic variation in practice patterns has been well documented, so some level of discretion on hospital admission decisions clearly exists. If the threshold for admitting patients varies geographically at a moment in time, then it would make sense that the threshold could also change over time in response to shifting constraints on provider resources. A key unanswered question is whether price-driven reductions in inpatient care have any effect, positive or negative, on beneficiaries’ health outcomes.