By Tal Gross, Adam Sacarny, Maggie Shi & David Silver
America spends about 6 cents of every dollar at its hospitals. A natural question to ask: why not just pay those hospitals less?
To answer that question, we need to know how hospitals respond to higher or lower reimbursement. If we pay hospitals less for each visit, could they respond by simply seeing fewer patients? The answer is not obvious. On the one hand, there’s a lot of evidence to suggest that incentives matter, even in healthcare. On the other hand, inpatient visits to the hospital are the most-expensive form of healthcare. It seems, perhaps, extreme to think that hospitals could “generate” more or fewer visits in response to how they are paid.
We recently wrote a paper to figure out whether hospitals can adjust the volume of patients they treat in response to financial incentives. We studied a major overhaul of how the federal Medicare program pays hospitals for each visit. Since 1983, Medicare reimburses hospitals using categories called “DRGs.” All patients are assigned to a DRG, and then the hospital receives a lump-sum payment based on that DRG. The DRGs often came in pairs to account for the complexity of the patient’s medical condition. For instance, there often exists a less-lucrative DRG for less-sick patients and a more-lucrative DRG for the condition if the patient has complications.
In 2008, Medicare switched from pairs of DRGs to triplets: patients were no longer labeled as either having complications or not. Instead, they were labeled as having no complications, having complications, or having “major complications.” That policy change shifted $2 billion across hospitals each year. Some hospitals benefited from the policy change, because their patients were more complex, and they would now be reimbursed more for that complexity. Other hospitals expected to be hurt by the policy change – their average Medicare reimbursement was set to decline – because fewer of their patients would be classified as having complications or major complications.
We compared hospitals that were set to see increases in their Medicare reimbursement to hospitals that expected decreases. That comparison provided very clear evidence that hospitals reacted to the policy change. Increases in the Medicare reimbursement rate led hospitals to admit more Medicare patients. For every thousand-dollar increase in average Medicare payments, we observed a 14-percent increase in Medicare admissions.
All in all, that finding suggests that a hospital’s inpatient volume is not simply a function of the local population’s health. Hospital volume, like so much else, responds to incentives. And so when policymakers consider increases or decreases in Medicare payment rates, they need to consider how providers will react.