Hospitals with a higher portion of Medicare patients had worse financials and were more likely to close or be acquired than facilities less reliant on Medicare payments, according to data published this week in Health Affairs.
The performances of these Medicare-reliant hospitals deteriorated even further during the later part of the analysis’s study period when Medicare inpatient price increases lagged hospitals’ growing costs, Harvard Medical School researchers found.
The increased rate of closures and consolidation that followed suggests hospitals were unable to offset insufficient revenue by reducing expenses or cost-shifting—a compensatory practice that was previously thought to be responsible for higher industrywide commercial prices.
“The cost-shifting narrative and the empirical strategies used to evaluate it typically assume no connection between public prices and the number of hospitals operating in the market,” the researchers wrote in Health Affairs. “We raise the possibility of ‘consolidation-induced cost-shifting,’ which recognizes that changes in public prices for hospital care can affect market structure and, through that mechanism, affect commercial prices.”
The researchers’ analysis included a sample of 2,986 hospitals’ cost reports from 2010 to 2016, which were collected from Medicare’s Healthcare Provider Cost Report Information System. They also collected supporting data on hospital closures and characteristics from the American Hospital Directory, Census Bureau and other sources.
Facilities with a higher share of Medicare patients were more often rural, nonteaching public hospitals, the researchers found. They often had fewer beds, lower wage indices and were located in counties with smaller and older populations.
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Hospitals with Medicare share exceeding 65% in 2010 had a -0.38 operating margin versus the 4.46 margin seen among those with Medicare shares below 35%, the researchers found. By 2016, that operating margin gulf widened to -3.45 and 5.32. The negative relationship between Medicare share and operating margin persisted during a regression analysis controlling for differences in hospital and market characteristics.
Overall, the analysis found that a hospital with a 65% Medicare share had a roughly 24% chance of being closed or acquired during the study period, compared to a roughly 16% chance for an identical hospital with a 35% Medicare share, the researchers found.
While the findings are reason for caution when scheduling public prices, the researchers wrote that the threat of closures shouldn’t keep public payers from reducing prices.
Prior policy literature suggests lower payments generally lead to more efficient operations, they wrote, and not all poor performers should be given a lifeline.
“Paying more than needed for most care to preserve access to some care and to forestall consolidation-induced commercial price increases would exacerbate the fiscal challenges facing Medicare,” the researchers wrote.
Critical access hospitals and others that provide services addressing unmet needs can be supported by existing programs, they said. As such, policymakers looking to tackle consolidation and rising commercial prices will be better served tackling those issues via antitrust initiatives and other regulations.
“Essentially, the existence of consolidation-induced cost-shifting must be a consideration in public fee setting but not a barrier to policy action,” the researchers wrote. “Payment levels and payment models must be designed to encourage the efficient production of care, while, simultaneously, policy must be designed to limit the deleterious consequences of market power.”