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VOLUME 49 | NUMBER 5 | OCTOBER 2014


Cutting Medicare Hospital Prices Leads to a Spillover Reduction in Hospital Discharges for the Nonelderly

Keywords: Medicare; hospitals; prices; access/demand/utilization of services; health economics; instrumental variables.

Objective: To measure spillover effects of Medicare inpatient hospital prices on the nonelderly (under age 65).

Primary Data Sources: Healthcare Cost and Utilization Project State Inpatient Databases (10 states, 1995–2009) and Medicare Hospital Cost Reports.

Study Design: Outcomes include nonelderly discharges, length of stay and case mix, staffed hospital bed-days, and the share of discharges and days provided to the elderly. We use metropolitan statistical areas as our markets. We use descriptive analyses comparing 1995 and 2009 and panel data fixed-effects regressions. We instrument for Medicare prices using accumulated changes in the Medicare payment formula.

Principal Findings: Medicare price reductions are strongly associated with reductions in nonelderly discharges and hospital capacity. A 10-percent reduction in the Medicare price is estimated to reduce discharges among the nonelderly by about 5 percent. Changes in the Medicare price are not associated with changes in the share of inpatient hospital care provided to the elderly versus nonelderly.

Conclusions: Medicare price reductions appear to broadly constrain hospital operations, with significant reductions in utilization among the nonelderly. The slow Medicare price growth under the Affordable Care Act may result in a spillover slowdown in hospital utilization and spending among the nonelderly.

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