Hospital Response to Medicaid Payment Cuts: Evidence from California

States faced with rapidly rising health care costs are increasingly turning to reductions in provider reimbursement in an effort to slow spending growth associated with the Medicaid program. With ongoing Medicaid eligibility expansions brought about by the Affordable Care Act, such actions by state Medicaid programs are likely to become more widespread. It is therefore imperative to understand the impact of such policies on patient care. In this paper, I assess hospitals' response to a broad ten percent reduction to Medicaid fee-for-service payments in California. Using hospital and emergency department discharge data from the California Office of Statewide Health Planning and Development, I use a difference-in-differences framework to identify the causal effect of the Medicaid payment reduction in California on the extensive and intensive margins of care: access to hospital care and intensity of treatment. Exemptions in the fee reduction for certain types of hospitals provide a natural control group of hospitals to which the fee decrease did not apply. I test for primary effects of the payment cut among Medicaid patients, as well as for potential spillover effects among more profitable non-Medicaid patients. I find no evidence of a large impact on patient care or access to care among Medicaid patients. However, I find an increase in intensity of care among non-Medicaid patients, suggesting a spillover effect. These results suggest that while the change in prices alone may have brought about some reduction in cost growth, Medicaid policymakers should consider other mechanisms that may be more effective in changing provider behavior.