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 1. Charge private payer higher prices 2. Improve efficiency: shorter length of stay, less cares, …. etc, without hurting quality 3. Lower quality of care

Research question Who bears the burden of 1997 BBA Medicare reimbursement cuts? 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 1980’s: mixed Early 1990’s: cost-shifting diminishing Early 1990’s: cost-shifting diminishing Around BBA 97: Around BBA 97: –Bernard, 2000 studied cross-subsidization between , elasticity was –Zwanziger and Bamezai, 2006, found cost-shifting between in CA was

Research Questions Central 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: Main Model: –Long-difference model at hospital level: Δ private price = Δ Medicare loss + control

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

Method Dependent variable: Dependent variable: –Private “price”: Private revenue / private discharges Private revenue / private discharges Private revenue / private days 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 ) +   Bite ( i, t, t-1 ) * ownership( i, t-1 ) + δ  Bite ( i, t, t-1 ) * HMO IV( 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 ) + η  Bite ( i, t, t-1 ) * FP Share( i, t-1 ) + λ  X ( i, t, t-1 ) +  X ( i, t-1 ) +  ( i, t ) + λ  X ( i, t, t-1 ) +  X ( i, t-1 ) +  ( i, t )

Method Key independent variable: 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: Other controls: –Δ case mix, size (beds), SNF, HH, and market dummies (HRR)

Results Δ Private Rev per Private Admission Δ Private Rev per Private Day Δ Private LOS IP Bite -.76**[.14]-.53**[.12]-.0008**[.00008] SNF Bite.11[.10]-.01[.02] [.00008] HH Bite.03[.04]-.0003[.009] [.00003] Δ case mix 482[556]44[124].29[.41] Teach198[228]-28[47].18[.16] NFP-381**[150]-36[33]-.05[.11] Public-154[188]-12[41]-.13[.14] HMO IV 2.69[6.31]0.91[1.34]-.01**[.0005]

Results Δ Private Rev per Private Admission Δ Private Rev per Private Admission IP Bite -1.06[.25]-.36*[.19] SNF Bite -.10[.10]-.09[.10] HH Bite.03[.04].03[.04] Δ case mix 486[557]413[556] HMO IV -2.45[7.39]2.73[6.31] FP Share 1.70[5.03] 10.12* 10.12*[5.82] Bite * HMO IV.008[.006] Bite * FP share **[.005]

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

Interpretations Large degree of cost-shifting comes from higher prices. 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 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. 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 Injecting “competition” (through managed care) may not prevent hospital cost-shifting