When Medicare cuts the prices it pays for hospital care—as it will under the Affordable Care Act—three bad things could happen. Not all of them should concern you, at least not in the way you might think.
First, some worry hospitals will "shift costs" to private payers. They needn't be concerned. A mountain of evidence now shows that it's unlikely.
Second, hospitals could cut costs. This is worth worrying about. Experience has shown that it's very hard to cut costs in health care in ways that don't harm care. There may be as much as 30% of health care delivered that provides no value—pure waste. But it's not as if the waste is like one, easily identified lump of fat that's simple to lop off.
Instead, health care is like a steak, with the fat marbled throughout. It's hard to cut it without also cutting muscle. Therefore, though it's not their goal, very often when hospitals cut costs, they do so in ways that can cause harm, even increase mortality. They may cut some fat, but they cut some muscle too.
A goal of health reform, as well as commercial market programs, is to help hospitals become more productive, to do more with less instead of doing less with less. A vast portfolio of new initiatives—from IT enhancements to new payment methods to quality monitoring—is designed to help hospitals and the rest of the system do just that. To the extent it works, we can worry a bit less about cost cutting. Despite encouraging signs, we don't really know that it'll work long term. We just don't have enough experience yet.
Finally, when hospitals lose revenue, some could lose profitability and close. This has been a significant concern in rural areas recently, with hospitals closing in increasing numbers in recent years and with an estimated 283 at risk of doing so in the near future.
Karen Joynt and colleagues examined the consequence of hospital closures for mortality, admissions, readmissions, and spending. Using a risk-adjusted, difference-in-differences approach, and 2002-2012 data for fee-for-service Medicare beneficiaries, they compared changes in hospital service areas (HSAs) that experienced a closure to those that didn't.
Nearly 200 hospitals closed in their study window. The authors found that patients living in areas experiencing one or more of those closures had no statistically significant different rates of overall mortality or hospitalization than comparable patients living in other areas. Hospital readmissions actually went down in areas experiencing closures. Trauma and stroke mortality rates were no different across closure and non-closure areas either, but heart attack mortality was lower in closure areas.
These results are consistent with the hypothesis that its lower quality hospitals that tend to close. As the authors point out, "inefficient hospitals, hospitals with low financial margins, and hospitals that provide poorly reimbursed services or that have low productivity are more likely to close than better-performing hospitals." [Links added.]
This is very encouraging, but I can think of one reason we might still worry. Hospital closures, without corresponding entry of new hospitals, lead to consolidation in the industry. In turn, consolidation increases commercial market prices and, by itself, doesn't improve quality.
In a way, this brings us back to cost shifting. If lower Medicare payments lead to closures, which leads to consolidation, which leads to higher private prices, it looks an awful lot like cost shifting. As far as I know, this chain of causality has not been directly documented in any empirical study.
This logic, however, highlights the important, mediating factor that cost shifting advocates often miss: market power. Too much discussion of cost shifting ignores it, suggesting that hospital costs are fixed and simply must be shifted, without regard to the market power necessary to do so. Understand market power and you'll understand when cost shifting can and cannot occur. (See the work of Stensland et al and Michael Morrisey or my talk.)
Ultimately, there's no iron clad rule that says that Medicare can reduce hospital payments with no bad outcomes, whether to patient care or to the structure of the market. However, we shouldn't just randomly worry. We should do the studies and pay attention to their findings. Sometimes lower hospital payments are not as devastating as we might fear. When they push lower quality hospitals from the market, they may do some good.
Austin B. Frakt, PhD, is a health economist with the Department of Veterans Affairs, an Associate Professor at Boston University’s School of Medicine and School of Public Health, and a Visiting Associate Professor with the Department of Health Policy and Management at the Harvard T.H. Chan School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of the Department of Veterans Affairs, Boston University, or Harvard University.