Cutting Medicare Hospital Prices Leads to a Spillover Reduction in Utilization Among the Nonelderly

Research Objective: Congress has on several occasions cut the prices that Medicare pays medical providers in order to rein in Medicare spending growth. But there is little consensus on the effects of such price cuts. Some argue that medical providers respond to price cuts by raising private prices (“cost shifting”) or increasing services provided to the privately insured, thereby increasing private costs. Others argue that payment reforms that reduce spending in Medicare will result in spillover savings in the private sector. The goal of this study is to measure spillover effects of changes in Medicare inpatient hospital prices on utilization among the nonelderly. 

Study Design: Outcomes include the market-level total inpatient hospital discharges and days provided to the nonelderly (under age 65), and the share of discharges and days provided to the nonelderly. We use metropolitan statistical areas (MSAs) as our market definition, and we measure utilization for each year from 1995 through 2009. We perform descriptive analyses of changes in nonelderly utilization, and also a series of 2-stage least squares (2SLS) panel data regressions with market- and year-fixed effects. In the 2SLS analyses, we measure the accumulated effects of changes in the Medicare inpatient hospital payment formula for each market-year, and we use those accumulated effects as instruments for the actual Medicare price. We measure Medicare prices using Medicare hospital cost reports, and we measure inpatient hospital utilization using the Healthcare Cost and Utilization Project State Inpatient Databases (HCUP-SID).

Population Studied: Our analysis includes all metropolitan markets in 10 selected states (AZ, CA, CO, FL, IA, MA, NJ, NY, WA, WI). These states were chosen because of the availability of HCUP-SID data, and because they are well populated and geographically diverse.

Principal Findings: Changes in the Medicare price are strongly and positively associated with changes in the volume of inpatient care provided to the nonelderly. A reduction of 10 percent in the Medicare price is estimated to reduce discharges among the nonelderly by about 5 percent. Changes in the Medicare price are not associated with changes in the share of inpatient hospital care provided to the elderly vs. nonelderly.

Conclusions and Implications for Policy, Delivery or Practice: Medicare price reductions appear to result in broad-based constraints in hospital capacity and operations, with significant reductions in utilization among the nonelderly. These findings imply that the slow Medicare price growth under the Affordable Care Act (ACA) may result in a spillover slowdown in hospital utilization and spending among the nonelderly.