When Medicare Fiscal Pressure Grows, Hospital Cost Shifting Follows

August 04, 2021 - Medicare funds are dwindling and revenues are declining. This financial strain could result in closures and acquisitions, paving the way for hospital cost shifting.

A Harvard Medical School research team studied the relationship between public payment and the hospital sector’s market structure in a recent study published in Health Affairs. The study revealed that hospitals with a higher share of Medicare patients often had lower revenue and a greater chance of closure or acquisition compared to those that were not as reliant on Medicare.

The findings were consistent with the research team’s concept of consolidation-induced cost shifting, which acknowledges that changes in public prices can impact market structure and in turn impact commercial prices.

Researchers used hospital cost reports from Medicare’s Healthcare Cost Report Information System between 2010 and 2016. During the study period, 19 percent of hospitals were acquired, and 4 percent closed. At the time, Medicare payment rates were rising at a slower rate than the hospital market, explaining why Medicare hospital margins fell from -4.9 percent to -9.7 percent, while all-payer hospital margins were simultaneously improving.

Hospitals with a high share of Medicare patients were less financially healthy overall, and the gaps continued to widen over time. Researchers deduced that a higher Medicare share was directly correlated with a greater chance of acquisition or closure.

A hospital with a 65 percent Medicare share had a 22 percent predicted probability of being acquired, whereas an identical hospital with a 35 percent Medicare share had a 16 percent predicted probability.

“These results do not negate findings from the literature that suggest that lower payment leads, on average, to more efficient operation,” the study explained.

“Our results simply suggest that not all hospitals can reduce expenses sufficiently to continue operations. In fact, the phenomenon of hospital closure suggests that expense reduction cannot offset revenue declines for all hospitals.”

Researchers suggested that there may be a need for policymakers to limit closure or acquisition-induced commercial hospital price increases in the future.

The hospital cost shifting theory suggests that if public payers reduce prices, prices will rise for commercial payers in order to make up for additional provider expenses.

Medicare Part A funding is expected to run out by 2024, and COVID-19 exacerbated financial pressures for many hospitals, creating a perfect storm for hospital cost shifting.

These changes will likely put pressure on policymakers to lower fees paid by public payers, the study explained. These anticipated low public fees have created some concern that providers will make up for smaller reimbursement rates by raising prices in the commercial market.

But researchers say that the theory lacks empirical support.

“This narrative serves both to justify high prices in commercial markets (because providers must charge high commercial prices to cover insufficient public prices) and to discourage policy makers from lowering public prices (because doing so will force providers to raise prices elsewhere, which will exacerbate other affordability problems),” the study explained.

The theory assumes that providers could hike up prices for commercial payers if they needed to, but they won’t do so unless public payment rates decrease.

“This may be the case for nonprofit providers, but evidence suggests that nonprofit providers often set prices in ways similar to for-profit providers,” the study continued.

“The cost-shifting narrative also assumes that expenses do not respond to payment, which evidence suggests is not the case: When prices fall, expenses also fall.”

In addition, the study noted that the results do not imply that public payers should avoid reducing fees for fear of inducing hospital closure or acquisition.

“Paying more than needed for most care to preserve access to some care and to forestall consolidation-induced commercial price increases would exacerbate the fiscal challenges facing Medicare,” the study stressed.

Researchers proposed that policymakers intervene and develop antitrust regulations to encourage competition and limit commercial price increases. The study concluded that policymakers should keep a close eye on consolidation-induced cost shifting, as it could have negative consequences on market power.

President Biden’s recent executive order put hospital consolidation at the forefront of discussion. The executive order specifically highlighted the dangers of mergers and acquisitions and encouraged agencies to keep a close eye on healthcare consolidation.