The Effect of Cuts in Medicare Reimbursement on Hospital Mortality

The Balanced Budget Act (BBA) of 1997 was introduced as a cost-saving measure that significantly cut Medicare reimbursements to hospitals, physicians, home health agencies, and skilled nursing facilities, with planned net spending reductions of $116.4 billion from 1998 to 2002 (Rivers and Tsai 2002). For hospitals, the rate of increase in prospective payment system (PPS) payments was slowed across all diagnosis-related groups (DRGs), disproportionate share payments were reduced, and indirect medical education payments were reduced. As a result of significant protests from the American Hospital Association (AHA), Congress passed the Balanced Budget Refinement Act (BBRA) in 1999 to restore $8.4 billion and subsequently passed the Benefits and Improvement Protection Act (BIPA) in 2000 to restore a further $11.5 billion of the original $116 billion reductions. As Medicare patients comprise roughly 40 percent of all hospitalized patients, reductions in Medicare payments have a significant impact on revenues for patient care services. Data from the Medicare Payment Advisory Commission (MedPAC) estimate that overall Medicare margins decreased from 10.3 percent in 1996 to 1.7 percent in 2002 (MedPAC 2004). During this time frame, the AHA cited “service closures and cutbacks as hospitals and other health care facilities attempt[ed] to wrestle with the BBA's dramatic reductions” (American Hospital Association 2003a, b). Private payer payment-to-cost ratios also decreased from 1997 to 1999 and remained flat in 2000–2001, putting added financial stress on hospitals (MedPAC 2005). As hospitals face financial stress, they may either maintain current service levels and accept lower profits or decrease operating expenses to preserve profits. Data from MedPAC indicate that nationwide, hospital costs per discharge rose at a slower rate than Medicare payments per discharge, suggesting that hospitals may have spent less on patient care during this time period in an effort to preserve their operating margins. Attempts to decrease operating expenses can potentially translate to curtailed services to patients, in forms such as decreased quantity and quality of nursing staff, reduced efforts to train and improve staff performance, less investment in infrastructure, and decreased levels of service. The response of a hospital to financial stress will likely depend not only on the size of the shock, but also on the baseline financial health of the hospital and level of hospital competition in the area. The effect that such changes in service provision may have on patient outcomes will depend on the illness severity of the patient population, as sicker patients have less physiologic reserve to withstand changes in their care. There is evidence from a number of different contexts that exogenous financial shocks may decrease the quantity of hospital services provided and affect the health outcomes of patients. A decrease in PPS reimbursement from 1985 to 1994 was found to increase 30-day mortality of acute myocardial infarction (AMI) patients (Shen 2003). Reductions in Medicaid reimbursements in California in the 1980s affected the number of services per admission, particularly in Medicaid-dependent hospitals, and services were reduced more significantly for Medicaid than privately insured patients (Dranove and White 1998). Price-competitive market reforms in New Jersey in the early 1990s were associated with rises in inpatient mortality rates for uninsured AMI patients, with concomitant decreases in the rates of revascularization and cardiac catheterization (Volpp et al. 2003). Similarly, the enactment of legislation in California to permit selective contracting for insurance companies (thereby allowing them to preferentially send patients to hospitals where they obtained lower prices) decreased the quantity of services provided to the uninsured (Gruber 1994). Along with exogenous financial shocks, baseline financial health may also affect quality of care; a study of acute care hospitals in New York found that the hospitals with the lowest inpatient operating costs and lowest fund balances had the highest likelihood of negligent medical injury (Burstin et al. 1993). It is crucial to determine whether the national policies that cut hospital Medicare reimbursement in 1997 adversely affected patient care, as policy makers continue to consider new cost-containment measures. We used hospital discharge data from Pennsylvania from 1997 to 2001 to examine whether quality of care worsened disproportionately in hospitals under more financial strain from the BBA. We examined 30-day mortality rates for a set of conditions chosen by the Agency for Healthcare Research and Quality (AHRQ) as important indicators of inpatient quality: hip fracture, stroke, acute myocardial infarction, and gastrointestinal hemorrhage. We additionally focused on whether outcomes for the uninsured worsened to a greater degree than other patients, as cost-saving reforms such as the BBA could be a mechanism contributing to larger disparities in health outcomes. Finally, we analyzed in turn whether the BBA affected length of stay, nurse staffing, or number of uninsured treated.