The Incidence of Medicare Payment Reduction: Evidence from the BBA of 97

The Incidence of Medicare Payment Reduction: Evidence from the BBA of 97 Vivian Y. Wu University of Southern California AcademyHealth Annual Research Meeting, June 5, 2007

Responses to Medicare Payment Cuts • Charge private payer higher prices • Improve efficiency: shorter length of stay, less cares, …. etc, without hurting quality • Lower quality of care

Research question • Who bears the burden of 1997 BBA Medicare reimbursement cuts?

Source: Dobson, A. et al., Health Affairs, Vol 25(1), 22-33

Prior Research • 1980’s: mixed • Early 1990’s: cost-shifting diminishing • Around BBA 97: • Bernard, 2000 studied cross-subsidization between 1994-1998, elasticity was -0.5. • Zwanziger and Bamezai, 2006, found cost-shifting between 1993-2001 in CA was -0.17.

Research Questions • Central questions: • Do and can hospitals raise prices to private payers? • Does the behavior differ by ownership type? • Does market environment (ownership composition and managed care) have any impact on this behavior?

Method • Main Model: • Long-difference model at hospital level: Δprivate price = Δ Medicare loss + control

Method • Key identifying variable: BBA “bite” variable Market basket increase Bite BBA reduction

Method • Dependent variable: • Private “price”: • Private revenue / private discharges • Private revenue / private days • Private LOS

Method: Formal Model P(i, t, t-1) = i +  Bite(i, t, t-1) +  Bite(i, t, t-1) * ownership(i, t-1) + δ  Bite(i, t, t-1) * HMO IV(i, t-1) + η Bite(i, t, t-1) * FP Share(i, t-1) + λ X(i, t, t-1) +  X(i, t-1) + (i, t)

Method • Key independent variable: • Ownership type: Teaching, NFP, Public • FP market effect: % FP discharges in MSA • HMO effect: Instrument for HMO penetration (% in large firms, % white collar) • Other controls: • Δcase mix, size (beds), SNF, HH, and market dummies (HRR)

Results

Key Findings • Overall cost-shifting: Yes, 76%. Ownership: not by individual status • Market effect: • ownership composition: • Yes, • More FP enables more cost-shifting • HMO penetration (IV): • No effect

Interpretations • Large degree of cost-shifting comes from higher prices. -> managed care may not be effective in price bargaining in late 1990’s. • Price increases more when there’s more FP in the market -> there is NFP-FP difference -> cost-shifting depends on some joint cost/quality function, which is determined by market composition

Policy Implications • The majority of “savings” from Medicare BBA cuts are financed through a hidden “tax” on privately insured. • Injecting “competition” (through managed care) may not prevent hospital cost-shifting

The Incidence of Medicare Payment Reduction: Evidence from the BBA of 97