The End of Hospital Cost Shifting and the Quest for Hospital Productivity

The End of Hospital Cost Shifting and the Quest for Hospital Productivity Although perennially relevant, investigation of the effect of Medicare hospital payment changes on hospital and health system performance has heightened salience today. The 2010 Patient Protection and Affordable Care Act (Public Law 111-148; hereafter, ACA) will permanently reduce the Medicare payments hospitals would otherwise receive. Its "productivity adjustment" will scale payments downward by the average rate at which private nonfarm businesses' productivity increases. That rate has been estimated to be 1.1 percentage points per year (Shatto and Clemens 2011), larger than historical, annual hospital productivity gains Unless hospitals become more productive, they will have to find other ways to handle lower growth in Medicare payments. How will the industry respond? Some observers do not believe all hospitals will be able to adequately respond, or at least not in ways Congress will tolerate (Antos 2013). Actuaries for the Centers for Medicare and Medicaid Services (CMS) have estimated that by year 2040, Medicare payment rates to hospitals will be half those of the commercial market, and lower still thereafter (Shatto and Clemens 2011). If such a large divergence between Medicare and commercial market rates occurs, it may create access problems for Medicare beneficiaries, motivating Congress to moderate Medicare's hospital payment schedule (Newhouse 2010). A premise of this scenario, and of the CMS analysis (Shatto and Clemens 2011), is that hospitals will not change private prices along with Medicare's. Recent work, including the article in this issue by