What Happens When Medicare Cuts Hospital Prices? Assessing the Impact on Inpatient Discharges Among the Elderly

November 2013

Among the major provisions of the Patient Protection and Affordable Care Act (ACA) is the tightening of Medicare payment policy. Specifically, the ACA permanently lowers the default rate of growth in Medicare prices for hospitals and most other providers by applying a downward adjustment each year equal to the growth in productivity throughout the economy.  This policy change is expected to reduce Medicare expenditures by $379 billion from 2012 through 2021, according to estimates by the Congressional Budget Office. However, the implications for provider behavior and the care received by patients are unclear.  Hospitals may attempt to recoup projected losses by increasing the volume of services they provide, raising private prices, or increasing the number and severity of reported diagnoses and procedures, also known as upcoding. Hospitals could also respond by reducing capacity or even by closing.

Of the possible responses to Medicare price cuts, changes in inpatient volume have received relatively little attention in the academic literature, and the few existing studies in this area offer contradictory results. In an article based on their HCFO-funded study, Chapin White, Ph.D., Center for Studying Health System Change, and Tracy Yee, Ph.D., Truven Health Analytics, examined how changes in Medicare payment rates to hospitals affect Medicare inpatient volumes. While the study focused on changes to hospital reimbursement that occurred before passage of the ACA, its findings have implications for Medicare savings under health reform. The study did not examine changes in payment to physicians or providers in other care settings, which could also affect hospitalization rates.