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?
Source: Dobson, A. et al., Health Affairs, Vol 25(1), 22-33
Prior Research



1980’s: mixed
Early 1990’s: cost-shifting diminishing
Around BBA 97:
– Bernard, 2000 studied cross-subsidization
between 1994-1998, elasticity was -0.5.
– Zwanziger and Bamezai, 2006, found
cost-shifting between 1993-2001 in CA
was -0.17.
Research 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:
– Long-difference model at hospital level:
Δ private price = Δ Medicare loss + control
Method

Key identifying variable: BBA “bite” variable
1.12
1.1
1.08
Market basket increase
1.06
1.04
1.02
1
0.98
0.96
0.94
Bite
BBA reduction
1996
1997
1998
1999
2000
Method

Dependent variable:
– Private “price”:
Private revenue / private discharges
 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)
+ δ  Bite(i, t, t-1) * HMO IV(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)
Method

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:
– 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
-.76**
[.14]
-.53**
[.12]
-.0008**
[.00008]
SNF Bite
.11
[.10]
-.01
[.02]
-.00001
[.00008]
HH Bite
.03
[.04]
-.0003
[.009]
.000007
[.00003]
Δ case mix
482
[556]
44
[124]
.29
[.41]
Teach
198
[228]
-28
[47]
.18
[.16]
-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]
IP Bite
NFP
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*
[5.82]
Bite * HMO IV
.008
[.006]
--
Bite * FP share
--
-.015**
[.005]
Key Findings


Overall cost-shifting: Yes, 76%.
Ownership: not by individual status
Market effect:
– ownership composition:
Yes,
 More FP enables more cost-shifting

– HMO penetration (IV):

No effect
Interpretations

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
-> 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.
Injecting “competition” (through
managed care) may not prevent
hospital cost-shifting