Hospitals offset Medicare price cuts with spending cuts

Hospitals offset lost revenue from cuts in Medicare hospital prices by spending less on operations, according to a new study in the journal Health Services Research.

Using Medicare hospital costs reports from 1996 to 2009, the study's authors analyzed and quantified the price impact of alterations to the Medicare payment formula from year to year. They found not-for-profit hospitals balanced out revenue reductions by decreasing operation expenses, while declines in revenue led to a one-to-one decrease in profits among for-profits.

Total patient revenue decreased $1.55 for every $1 reduction in Medicare revenue, according to researchers Chapin White, a senior researcher with the Center for Studying Health System Change, and Vivian Yaling Wu of the Sol Price School of Public Policy. "This finding suggests that hospitals do not recoup lost Medicare revenues through cost shifting, and, in fact, a loss of Medicare revenue appears to have a negative spillover effect on total revenues," the authors wrote. This is consistent with previous research by White, which found a 10 percent cut to Medicare payments could reduce private payer rates by as much as 7.73 percent, FierceHealthFinance previously reported.

Of the $1.55 revenue reduction, hospitals counterbalance $1.40, or 90 percent, with a reduction in operating expenses, according to the study. About 60 percent of those cuts were personnel costs.

"On average, hospitals do not appear to make up for Medicare cuts by 'cost shifting,' but by adjusting their operating expenses over the long run," the researchers concluded. "The Medicare price cuts in the Affordable Care Act will 'bend the curve,' that is, significantly slow the growth in hospitals' total revenues and operating expenses."

To learn more:
- here's the study abstract