Hospital cost shifting revisited: new evidence from the balanced budget act of 1997

Abstract

This paper analyzes hospital cost shifting using a natural experiment generated by the Balanced Budget Act (BBA) of 1997. I find evidence that urban hospitals were able to shift part of the burden of Medicare payment reduction onto private payers. However, the overall estimated degree of cost shifting is small and varies according to a hospital's share of private patients. At hospitals where Medicare is a small payer relative to private insurers, up to 37% of BBA cuts was transferred to private payers through higher payments. In contrast, hospitals with greater reliance on Medicare were more financially distressed, as these hospitals saw large BBA cuts but were limited in their abilities to cost shift.

Contrary To Cost-Shift Theory, Lower Medicare Hospital Payment Rates For Inpatient Care Lead To Lower Private Payment Rates

“…Researchers have developed proxies for private payment rates using publicly available data, but they are imprecise at best. 8 Fourth, many cost-shifting studies have measured payment rate changes over periods of five years or less, some as short as two years. Analyzing payment rates over very short periods is inadequate because private insurers and hospitals typically negotiate multiyear contracts.…”

The Long-term Impact of Medicare Payment Reductions on Patient Outcomes

“…In addition, there may be unobserved hospital characteristic or market conditions that are correlated with both Medicare revenue and outcomes. We use an instrumental variable exploiting the exogenous variation in changes in Medicare reimbursement as a result of policy change following Shen (2003), Dafny (2005) and Wu (2010). We use two instruments: "BBA bite" and share of…”

“…Because the BBA was passed in 1997 and hospitals may start to respond strategically immediately, we fix DRG input values at the year prior to BBA. We then generate a BBA "bite" to capture the cumulative effect of BBA between 1996 and 2000, which measures the difference between the hypothetical DRG price had there been no BBA and the simulated DRG price index (see Wu, 2010 for the detail construction of the BBA "bite"). We focus on the cumulative payment cuts between 1996 and 2000 for the "pure" This calculation assumes that in the counterfactual world, Medicare revenue will go up by a full market basket update between 1996 and 2000.…”

“…In contrast, a hospital's ability to cost shift was more limited in late 1990s as the environment became more price competitive. A recent study shows that hospitals on average shifted just 21% of BBA payment reductions to private payers between 1996 and 2000 (Wu 2010). Therefore, hospitals may have to absorb most of the BBA cuts.…”

Mitigating the Problem of Unmeasured Outcomes in Quality Reports

“…Incentives from some payment systems in hospitals "spill over" onto patients from other payers. See Van Horn, Burns and Wholley (1997), Bernard (2000), and Wu (2005). One interpretation of these findings is that spillovers arise from common features of the production of care in hospitals.…”