By Chapin White and Tracy Yee THE CARE SPAN When Medicare Cuts Hospital Prices, Seniors Use Less Inpatient Care ABSTRACT The Affordable Care Act permanently slows the growth in Medicare hospital prices. To better understand the effects of those price cuts, we used data from ten states for the period 1995–2009 to examine the market-level relationship between Medicare prices and hospital utilization among the elderly. Regression analyses indicate that a 10 percent reduction in the Medicare price was associated with a 4.6 percent reduction in discharges among the elderly. This volume response to price cuts appears to be accomplished through hospitals’ reduction in their numbers of staffed beds. They did not leave beds empty; instead, they reduced their scale of operations. Based on our results, we conclude that the Affordable Care Act will help reduce inpatient hospital utilization in the future. From a federal budgetary standpoint, lower utilization is good news, but the implications for patient care and health outcomes are not yet clear. H istorically, when faced with pressure to rein in Medicare spending, Congress has cut pro- viders’ payment rates. For exam- ple, the Balanced Budget Act of 1997 cut Medicare inpatient hospital prices and tightened the payment policy for other pro- viders, producing five-year federal savings well in excess of the $112 billion initially projected. 1 The Affordable Care Act tightens Medicare pay- ment policy in a more gradual but similarly far- reaching way. The act permanently lowers the default rate of growth in Medicare prices for hospitals and most other providers by applying a downward adjustment each year equal to the growth in productivity throughout the economy. The Congressional Budget Office projects that the Medicare price cuts in the Affordable Care Act will reduce Medicare expenditures by $379 billion from 2012 through 2021. 2 But policy makers have questioned these price cuts on sev- eral grounds: Will they actually reduce federal spending? Will people with private insurance foot the bill? Will providers remain solvent? Will Medicare beneficiaries lose access to care? Although we could not answer all of these questions, we undertook this study to at least determine whether savings from the price cuts will be offset by volume increases, and what ef- fects the price cuts will have on the volume and intensity of inpatient services that the elderly receive. Hospitals could react to Medicare price cuts in one of four ways. First, they might increase the volume of Medicare services they provide to make up for the lower per service price, which could reduce or even negate any federal savings. 3 Second, they might “upcode”—that is, change their reporting of diagnoses and procedures in a way that would increase their payments. Third, hospitals might reduce their capacity or even close, which could reduce hospital utiliza- tion and increase federal savings on hospital care. Reduced hospital utilization could indicate either problems in accessing care or benign shifts in clinical practice patterns, depending on how the reduction is accomplished. And fourth, hospitals might raise the prices they doi: 10.1377/hlthaff.2013.0163 HEALTH AFFAIRS 32, NO. 10 (2013): 1789–1795 ©2013 Project HOPE— The People-to-People Health Foundation, Inc. Chapin White (cwhite@ hschange.org) is a senior health researcher at the Center for Studying Health System Change, in Washington, D.C. Tracy Yee is a research leader at Truven Health Analytics, in Bethesda, Maryland. October 2013 32:10 Health Affairs 1789 Medicare Hospital Prices Downloaded from HealthAffairs.org on May 31, 2020. Copyright Project HOPE—The People-to-People Health Foundation, Inc. For personal use only. All rights reserved. Reuse permissions at HealthAffairs.org.