1. How Will Mandated Medicare Payment Rate Reductions Affect Hospitals and Patients to 2050?
Jack Homer1, Gary Hirsch1, Liming Cai2
1Independent consultants
2Office of the Actuary, Centers for Medicare and Medicaid Services
INFORMS Annual Meeting
San Francisco, November 9-12, 2014

2. Abstract
The Affordable Care Act mandates permanent Medicare payment growth rate reductions to hospitals and other non-office providers. Medicare’s Office of the Actuary initially calculated that these reductions could cause most such providers to become unprofitable by 2040, likely leading to hospital closures and adverse impacts for patients. But this calculation was simplified, e.g., ignoring the implications of population aging and fixed costs. OACT is using system dynamics modeling to explore more nuanced projections.

3. Background
Under ACA, growth of Medicare non-office payment rates are being cut by about 1% per year (against expected 2-3% real cost growth), reducing Medicare outlays by tens of $B per year by 2020+
Most hospitals consequently in the red by 2040? (CMS-OACT 2010)
And, as a result, worse patient outcomes?
(Wu and Shen NBER 2011, finding higher mortality rate for hospitals hit hardest by rate cuts in Balanced Budget Act of 1997) 8%
ACA payment rate cuts in effect 6%
Will reduced profitability hurt patients?
Death rate in
Medicare popn
(%/yr.) 4%
Hospital average
profit margin (%)
How much will hospital profitability suffer? 2%
Data sources: Vital Statistics; American Hospital Assoc. 0% 3

4. Information Sources
Longitudinal Data ( ; population projections to 2050)
Senior population and deaths (65-84, 85+): Census, Vital Stats, Soc Security Admin
Inpatient stays and readmissions by insurance type: NHDS, MEPS
Medicare readmission rate distribution across hospitals: CMS 2011
ER & Outpatient Dept. (OPD) visits by insurance type: NHAMCS, MEPS
Inpatient, ER, and OPD payments by insurance type: NHE, MEPS
Hospital beds, length of stay, occupancy, and profit margins: AHA
Medicare-specific visits, payments, and profit margins (Hospital, SNF, HH): MedPAC (Medicare Payment Advisory Committee)
SNF & HH profit margins and Medicare as fraction of revenue: CMS
Published Studies
Effect of ICU waiting time on mortality: Yu JGIM 2000, Wunsch AJRCCM 2011
Fixed vs. variable portion of hospital overhead costs: Roberts JAMA 1999, Rauh HFMA 1999, Noreen & Soderstrom JAE 1994
Hospital: Acute Care Non-Federal; SNF: Skilled Nursing Facility; HH: Home Health Agency 4

5. Model Overview Hospital: Acute Care Non-Federal
SNF: Skilled Nursing Facility
HH: Home Health Agency
Dynamic factors:
1-. When Medicare payment rates are cut, hospitals may initially shift costs to private insurers, but private insurers will ultimately cut their own rates (follow suit) as well; Medicaid may also follow suit.
2-. Negative hospital profitability or excessive occupancy leads to some cutback of services, in an attempt to reduce cost. However, such lowering of care intensity (quality) can increase readmissions and hospital mortality.
3-. Negative SNF or HH profitability leads to reduced availability, as some providers pull back or fall by the wayside. Reduced SNF or HH availability leads to more hospital readmissions.
4-. Medicare is now penalizing hospitals for excessive readmissions.
5+. Hospitals have some ability to improve service productivity as a way of offsetting revenue cuts.
6+. Hospital beds are normally adjusted toward a desired occupancy rate, but if profits go negative, bed growth will be inhibited as a way of stabilizing profits.
7+. Population aging will increase use of hospitals and extended care (skilled nursing facilities, home health agencies).
8+. The same is true of ACA insurance expansion.

6. Average Profit Margins in the Base Run
Hospital (facility) HH
SNF
data sources for margins: AHA (hospital, ), CMS (HH, SNF, ) 6

7. Care Status Metrics in the Base Run
SNF availability
Hospital intensity
HH availability
Hospital occupancy
data source for hospital occupancy: AHA ( ) 7

8. Average Readmission Rates in the Base Run
Medicare-specific
Overall
data sources for readmission rates: NHDS, MEPS (2007) 8

9. Key Uncertainties Affecting Model Outcomes
Hospital productivity gains: What if less productivity gain?
Follow suit: What if Private and Medicaid follow suit more?
Effects of intensity: What if greater adverse effects on readmissions and deaths?
Extended care availability: What if even less availability at low margins?
Phase out cuts if margins dropping too fast: Sufficient to stem the tide and avoid problems?
Outcome Metrics (accumulate )
Medicare hospital and extended care payments (affecting Medicare viability)
Fraction of beds in the red (negative margin) (affecting hospital viability)
Readmissions (affecting patient morbidity and productivity)
Senior deaths
Unmet need for extended care (affecting patient morbidity and productivity) 9

10. A Layered Sequence of Simulations
No cuts = $ Trillion
Pink cell: notable adverse effect; Green cell: notable beneficial effect 10

11. Three Runs Compared Run 11: most pessimistic case
Average Hospital Facility Margin
Run 11: most pessimistic case
Run 12: most pessimistic but
with phase-out of rate cuts
Base
Run 12
Average Hospital Readmission Rate
Run 11
Run 11
Home Health Availability
Run 12
Base
Run 12
Base
Run 11 11

12. Conclusions
With volume growth and occupancy increases, most hospitals are likely to maintain healthy profit margins in the coming decades despite permanent Medicare payment rate cuts, and without the need for service cutbacks.
SNF’s similarly look well positioned to withstand Medicare rate cuts, but home health margins are likely to turn negative starting in the late 2030s, and home health availability is likely to suffer somewhat.
Under more pessimistic assumptions, the outlook for hospitals, SNFs, and home health could all be much worse starting in the 2030s, and the majority of facilities could be in the red by 2050, leading to significant adverse effects for patients, including 5 million more preventable deaths.
But such a worst-case trajectory, should it start to play out, will become obvious by the early 2020s. In response, a gradual phase-out of rate cuts would successfully stabilize the system and avoid the adverse effects. 12