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Hospitals Respond To Medicare Payment Shortfalls By Both Shifting Costs And Cutting Them, Based On Market Concentration

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Abstract

The coverage expansions planned under the Affordable Care Act are to be financed in part by slowing Medicare payment updates to hospitals, thereby reigniting the debate over whether low prices paid by public payers cause hospitals to increase prices to private insurers--a practice known as cost shifting. Recently, the Medicare Payment Advisory Commission (MedPAC) proposed an alternative explanation of hospital pricing and profitability that could be used to support policies that pressure hospitals to reduce overall costs rather than to only raise prices. This study evaluated the cost-shift and MedPAC perspectives using 2008 data on hospital margins for 30,514 Medicare and privately insured patients undergoing any of seven major procedures in markets where robust hospital competition exists and in markets where hospital care is concentrated in the hands of a few providers. The study presents empirical evidence that, faced with shortfalls between Medicare payments and projected costs, hospitals in concentrated markets focus on raising prices to private insurers, while hospitals in competitive markets focus on cutting costs. Policy makers need to examine whether efforts to promote clinical coordination through provider integration may interfere with efforts to restrain overall health care cost growth by restraining Medicare payment rates.
By James Robinson
Hospitals Respond To Medicare
Payment Shortfalls By Both
Shifting Costs And Cutting Them,
Based On Market Concentration
ABSTRACT
The coverage expansions planned under the Affordable Care Act
are to be financed in part by slowing Medicare payment updates to
hospitals, thereby reigniting the debate over whether low prices paid by
public payers cause hospitals to increase prices to private insurersa
practice known as cost shifting. Recently, the Medicare Payment Advisory
Commission (MedPAC) proposed an alternative explanation of hospital
pricing and profitability that could be used to support policies that
pressure hospitals to reduce overall costs rather than to only raise prices.
This study evaluated the cost-shift and MedPAC perspectives using 2008
data on hospital margins for 30,514 Medicare and privately insured
patients undergoing any of seven major procedures in markets where
robust hospital competition exists and in markets where hospital care is
concentrated in the hands of a few providers. The study presents
empirical evidence that, faced with shortfalls between Medicare payments
and projected costs, hospitals in concentrated markets focus on raising
prices to private insurers, while hospitals in competitive markets focus on
cutting costs. Policy makers need to examine whether efforts to promote
clinical coordination through provider integration may interfere with
efforts to restrain overall health care cost growth by restraining Medicare
payment rates.
Payment rates from Medicare to hos-
pitals have lagged behind the
growth in hospital costs over recent
years, leading to negative hospital
profit margins on publicly insured
patients.1,2 These negative Medicare margins
have reignited the long-standing debate over
whether the public insurance program is parti-
ally responsible for the high prices charged to
private insurers, as hospitals seek to offset losses
on one set of patients with profits from an-
other.37
Recently, however, the Medicare Payment Ad-
visory Commission (MedPAC) staff has pro-
posed an alternative explanation for negative
Medicare margins, one that reverses the direc-
tion of causality and interprets Medicare pay-
ment slowdowns as a means toward the reduc-
tion of hospital costs rather than a shifting of
costs from public to private payers.8
The policy implications of the MedPAC per-
spective are different from those flowing from
the cost-shift perspective, especially with respect
to plans to finance part of the coverage expan-
sion mandated by the Affordable Care Act of 2010
through slowing Medicare payment updates to
hospitals.9
According to the cost-shift perspective, Medi-
care should increase its payment rates to hospi-
tals in order to hold down the prices charged by
hospitals to private insurers and, thereby, the
premiums charged by those insurers to employ-
doi: 10.1377/hlthaff.2011.0220
HEALTH AFFAIRS 30,
NO. 7 (2011): 12651271
©2011 Project HOPE
The People-to-People Health
Foundation, Inc.
James Robinson (james
.robinson@berkeley.edu) is the
Leonard D. Schaeffer
Professor of Health
Economics and director of the
Berkeley Center for Health
Technology, University of
California, Berkeley.
JULY 2011 30:7 Health Affairs 1265
Challenges For Hospitals
by JAMES ROBINSON on July 7, 2011Health Affairs by content.healthaffairs.orgDownloaded from
ers and individuals. According to the MedPAC
perspective, Medicare should not increase its
payment rates simply because there is evidence
of negative hospital margins. Rather, the Med-
PAC perspective would suggest that private in-
surers should join Medicare in resisting hospital
price increases, thereby increasing pressure on
hospitals to improve efficiency.
The choice between revenue enhancement and
cost reduction will become more acute as the
federal government seeks to reduce its budget
deficit in part by reducing Medicare payments to
hospitals. The ability of hospitals to charge
higher prices to private insurers than to Medi-
care has been well documented. The influence of
market structure on hospital profit margins,
which is central to the MedPAC focus on cost
reduction, has not received commensurate
attention.
This study provides empirical analysis of the
cost-shift and MedPAC perspectives by examin-
ing data on hospital margins for Medicare and
private insurance in competitive and concen-
trated hospital markets. The detailed patient-
level data permit the study to adjust for differ-
ences due to patient demographics, diagnoses,
comorbidities, and complications, as well as to
characteristics of the hospitals themselves and of
the markets within which they are located.
Cost And Price Dynamics: Two Views
Two conceptual frameworks seek to explain hos-
pital costs, pricing, and profits for privately in-
sured and Medicare patients. These perspectives
do not take directly opposing positions but,
rather, emphasize different dynamics in the hos-
pital market and generate different policy impli-
cations. Both highlight the hospitals need to
cover its costs from a mix of revenue sources,
some of which it can influence and some of which
it cannot.
Hospitals are price takerswith respect to
Medicare, which pays according to a formula
that includes the patients primary and secon-
dary diagnoses, major procedures, unusual out-
lier expenditures, area wages, and other factors
but not the structure of the local market.10 Medic-
aid programs typically pay hospitals at even
lower rates than does Medicare. In contrast, hos-
pitals negotiate prices with private insurers and,
in markets where facilities have consolidated
into multihospital chains, can be interpreted
as price makersthat can leverage prices not
only to cover the costs incurred in the treatment
of privately insured patients but also to cover the
shortfalls in payments from Medicare.11
Cost Shifting In the cost-shift perspective,
the direction of causality runs from high hospital
costs to negative Medicare margins, since Medi-
care does not pay adequately to cover the costs
incurred by its beneficiaries, and then to high
prices charged to private insurers.
Some health economists distinguish between
cost shifting and price discrimination. Price dis-
crimination is defined as different prices charged
to different payers for similar services. Cost shift-
ing is defined more narrowly as a dynamic re-
sponse by hospitals to a reduction in Medicare
payments, in the form of a fully or partially com-
pensating increase in prices charged to private
insurers.
In the policy debate over Medicare payments,
however, cost shifting is defined broadly as pay-
ments that fall short of the costs incurred by
hospitals in the treatment of Medicare benefici-
aries, as measured through negative hospital
margins on those patients. In this article the
term cost shifting is used in this broader sense.
Implicit in the cost-shift perspective is the
assumption that hospitals have unused bargain-
ing leverage when negotiating with private in-
surers. In other words, the reasoning goes, when
hospitals suffer Medicare payment shortfalls,
they are able to raise prices to private insurers
because the hospitals have some degree of mar-
ket power. Furthermore, the cost-shift perspec-
tive assumes that costs are not themselves deter-
mined by prices and payment rates.
Costs rise as a result of changes in clinical
technology, labor-market shortages, govern-
mental regulations, tort liability, and other fac-
tors, but not simply because the hospital is able
to raise prices to private insurers. Otherwise put,
costs drive prices, but prices do not drive costs.
This perspective is buttressed by an empirical
literature that finds price increases to private
insurers when public-payer payment shortfalls
become acute.1217
MedPAC Perspective In the perspective ar-
ticulated by MedPAC, the direction of causality
runs from high prices charged to private insurers
to high hospital costs and then to negative Medi-
care margins. In this view, hospitals in concen-
trated local markets raise the prices they charge
to private insurers because they hold strong bar-
gaining positions and are immune to threats that
they will be excluded from an insurance com-
panys network of providers. They do this regard-
less of whether Medicare payments are adequate
or inadequate to cover the treatment costs for
Medicare beneficiaries.
This MedPAC perspective relies on the empiri-
cal literature that documents higher hospital
prices charged to private insurers (but not to
Medicare) in concentrated local markets, com-
pared to the prices charged by hospitals in com-
petitive markets. The extensive research litera-
Challenges For Hospitals
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ture on hospital market structure and pricing
has been reviewed by Robert Town and William
Vogt.18
In the MedPAC view, high revenues from pri-
vate insurers are used by hospitals in concen-
trated markets to finance expansions in capacity,
acquisition of new clinical technologies, and hir-
ing of additional staff. Costs are directly affected
by prices, in that higher revenues permit hospi-
tals to finance cost-increasing investments. Be-
cause hospitals are not able to use their bargain-
ing power to raise payment rates from Medicare,
the higher hospital costs per patient that are
facilitated by higher prices for private insurers
result in negative hospital margins for Medicare
patients.
Key Difference The key difference between
the two perspectives concerns the role of market
structure in influencing hospital margins from
Medicare patients. The MedPAC staff interprets
the concentration of local hospital markets and
resulting price increases to private insurers as
leading to higher hospital costs and then to neg-
ative margins for Medicare patients. It predicts
that Medicare margins should be lower in con-
centrated markets, where hospital bargaining
power against private insurers is strong and mar-
gins on privately insured patients are high, than
in competitive markets.
The cost-shift perspective predicts that hospi-
tals are able to charge higher prices to, and earn
larger margins from, private insurers than Medi-
care, even if the costs of treating Medicare pa-
tients are higher because of these patientsage
and disease severity. It makes no prediction con-
cerning the association between market struc-
ture and Medicare margins, since neither costs
nor Medicare payments are expected to vary be-
tween concentrated and competitive markets.
Despite differences in focus, the cost-shift and
MedPAC perspectives on hospital pricing and
profitability should be viewed as complements
rather than substitutes. Faced with impending
shortfalls in Medicare payments relative to an-
ticipated cost trends, hospitals can pursue both
revenue enhancement and cost moderation.
As highlighted by the cost-shift literature, the
primary locus for revenue enhancement is
through increased prices to private insurers.
As highlighted by the MedPAC analysis, hospi-
tals also can seek to reduce the rate of growth in
costs. The key determinant is the structure of the
local hospital market. Hospitals in concentrated
markets may focus on revenue enhancement.
Hospitals in competitive markets must focus
on cost moderation or face declining and ulti-
mately negative profit margins.
Study Data And Methods
Data were obtained on 30,514 patients admitted
to any of sixty-one hospitals for total knee
replacement, total hip replacement, lumbar
spine fusion, cervical spine fusion, coronary an-
gioplasty with drug-eluting stent, insertion of
cardiac pacemaker, or insertion of implantable
cardioverter defibrillator. These facilities were
participants in the value-based purchasing ini-
tiative of the Integrated Healthcare Association,
a coalition of large hospitals, medical groups,
and health insurance plans in California, or
worked on value purchasing with Aspen Health
Metrics, a hospital consulting firm. They are dis-
tributed across twenty-seven local hospital mar-
kets in eight states.
The market for each hospital was identified as
the Hospital Referral Region, developed for the
Dartmouth Atlas based on patient-flow data for
Medicare patients.19 The Dartmouth Atlas assigns
every hospital in the United States to one of 306
markets. The American Hospital Associations
2008 Annual Survey of Hospitals provided data
on the number of staffed beds, average annual
earnings for hospital staff, and teaching status of
each hospital facility.
The concentration of each local hospital mar-
ket was measured in terms of the Herfindahl-
Hirschman Index,20 the standard measure used
in economic analyses of market competition.21
The market shares of hospitals within each mar-
ket that belonged to the same chain were com-
bined so as to produce a measure of true com-
petitive potential, instead of treating different
facilities that are owned by the same chain as
competing with each other. To control for the
effect of market size, the population size of the
metropolitan regions served by each hospital
also was included in the analysis.
The variable of primary interest for this study
is the contribution margin earned by each hos-
pital from the care of each individual patient. The
contribution margin was defined and measured as
the difference between the revenue obtained by
the hospital from the patients insurer (Medicare
or a private insurer) and the direct costs ex-
pended by the hospital in the care of that patient.
Revenues were measured in terms of the
amount actually collected by the hospital for
each patient, which derived from contracted
prices (for the private insurers) and diagnosis-
related group payment rates (for Medicare). Rev-
enue included payments made directly by pa-
tients according to deductible and coinsurance
provisions in their insurance coverage. Reve-
nues were not measured in terms of hospitals
list prices (charges).
Hospital cost data were obtained from each
facilitys cost accounting system. Cost account-
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ing systems are not standardized across hospi-
tals, but there is no reason to assume that ac-
counting methods are systematically correlated
with the degree of concentration in each hospi-
tals local market. The contribution margin did
not take into account hospitalsoverhead ex-
penses, such as administration, capital depreci-
ation, and charity care for uninsured patients;
thus, it is not equivalent to a hospitals total
profit margin.
Multivariate statistical methods were used to
measure the association between contribution
margin, on the one hand, and the index of hos-
pital market structure, area population, annual
hospital volume for each procedure, staffed
beds, hospital teaching status, average annual
earnings of hospital staff, principal diagnoses,
comorbidities, complications, age, and dis-
charge destination, on the other hand.22
The calculation of standard errors for the
multivariate regression analyses was modified
to cluster for within-hospital correlation of
prices and margins across patients. It is to be
expected that unmeasured determinants of pric-
es and margins will be correlated for patients
treated at the same hospital.23
Study Results
Exhibit 1 presents average hospital costs, reve-
nues, and contribution margins per patient for
Medicare and privately insured patients. For all
seven procedures examined, the average cost of
care was higher for Medicare beneficiaries than
for privately insured patients. However, average
revenues were higher for privately insured pa-
tients by substantial amounts.
All procedures yielded positive contribution
margins for Medicare patients, but the margins
on privately insured patients were higher by a
factor of ten or more.24 If the seven procedures
are weighted according to the number of patients
treated with each, average costs were 5.4 percent
higher for Medicare than for privately insured
patients. Average payments were 68 percent
higher, and contribution margins, 831 percent
higher, for privately insured than for Medicare
patients.
As an example, the average cost of treatment
for Medicare patients undergoing knee replace-
ment ($12,617) was higher than that for privately
insured patients ($11,987). However, the aver-
age payment obtained by the hospital from Medi-
care ($13,372) was lower than that obtained for
privately insured patients ($22,617). Hospitals
obtained positive, although modest, contribu-
tion margins for Medicare patients ($755) but
substantial contribution margins for privately
insured patients ($10,630). Similar patterns of
higher Medicare treatment costs but lower rev-
enues and contribution margins were observed
for the other six procedures.
Exhibit 2 presents the association between the
structure of the local hospital market and the
hospitals contribution margin from Medicare
and privately insured patients, respectively.25
These data were adjusted for patient character-
istics, including diagnoses, comorbidities, com-
plications, age, and discharge destination, and
hospital characteristics, such as bed size, surgi-
cal volume, teaching status, area population, and
average salary level.
Hospital margins on privately insured patients
were significantly higher in concentrated mar-
Exhibit 1
Hospital Costs, Revenues, And Contribution Margins For Medicare And Privately Insured Patients
Payer
Knee
replacement
Hip
replacement
Lumbar
fusion
Cervical
fusion
Angioplasty
with stent
Pacemaker
insertion
Defibrillator
insertion
Cost per procedure ($)
Medicare 12,617 13,323 25,041 13,281 13,045 13,932 35,395
Private ins. 11,987 12,596 24,395 11,641 11,527 13,486 32,701
Revenue per procedure ($)
Medicare 13,372 13,683 25,725 14,647 15,843 16,980 37,499
Private ins. 22,617 23,931 47,085 21,124 26,052 26,353 54,233
Contribution margin ($)
Medicare 755 360 684 1,366 2,798 3,048 2,104
Private ins. 10,630 11,335 22,690 9,483 14,525 12,867 21,532
Number of patients in study
Medicare 7,097 3,147 1,430 552 3,070 2,920 968
Private ins. 3,435 2,067 1,589 1,257 2,226 457 299
SOURCE Authors calculations on 2008 data obtained from hospitals as part of the value purchasing initiatives of the Integrated Healthcare Association and Aspen Health
Metrics.
Challenges For Hospitals
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kets than in competitive markets for all proce-
dures, indicative of the stronger bargaining
power obtained in contexts where private insur-
ers cannot credibly threaten the hospitals with
network exclusion.26 The market-related differ-
ences ranged from a low of $6,202 for patients
undergoing knee replacement to a high of
$10,990 for patients undergoing lumbar fusion.
The market-related difference in contribution
margin was 82 percent for knee replacement,
137 percent for hip replacement, 64 percent
for lumbar fusion, 119 percent for cervical fu-
sion, 106 percent for angioplasty, 77 percent
for pacemaker insertion, and 48 percent for
defibrillator insertion.
In contrast to the margins earned from pri-
vately insured patients, margins from Medicare
patients were positive for all seven procedures in
competitive markets but negative for four pro-
cedures in concentrated markets.27 For the two
orthopedic joint procedures, Medicare margins
were negative and were lower in concentrated
than in competitive markets by $1,890 (knee
replacement) and $1,326 (hip replacement).
For the cardiac device insertion procedures,
Medicare margins were positive but were still
lower in concentrated than in competitive mar-
kets by $2,222 (pacemaker) and $4,670 (defib-
rillator).28 Medicare margins did not vary signifi-
cantly between concentrated and competitive
markets for lumbar and cervical fusion proce-
dures and for coronary angioplasty with stent.
Discussion
This paper presents empirical support for both
the cost-shift and the MedPAC perspectives on
hospital price and profitability dynamics. The
data in Exhibit 1 provide strong evidence that
Medicare payment rates fall well below those
for privately insured patients, even though Medi-
care beneficiaries incur higher costs of treat-
ment. Hospitals therefore earn much higher con-
tribution margins from privately insured than
from publicly insured patients. This result is con-
sistent with the cost-shift perspective.
The data in Exhibit 2, however, indicate that
contribution margins from Medicare were sig-
nificantly lower in concentrated than in competi-
tive markets for four of the seven procedures
studied. This result is consistent with the Med-
PAC perspective. Medicare margins from the
other three procedures did not differ according
to local market structure.
The empirical support for both the cost-shift
and MedPAC perspectives is consistent with the
view that these conceptual frameworks are com-
plements rather than substitutes. They represent
two different but not incompatible hospital re-
sponses to constrained Medicare payments.
Faced with shortfalls between payments and pro-
jected costs, hospitals can either increase prices
to private insurers or reduce costs, or both.
It generally is more desirable, from a hospital
management perspective, to increase revenues
than to reduce costs, because the former merely
alienates insurers, but the latter alienates em-
ployees, physicians, and potential patients.
The cost-shift perspective highlights the reve-
nue-enhancement hospital response to Medi-
care payment shortfalls.
The hospitals ability to pursue revenue en-
hancement over cost reduction will depend,
however, on the degree of competition in the
local market. Hospitals in competitive markets
will be less able than those in concentrated mar-
kets to raise prices and hence must either reduce
costs or suffer erosion in their profitability. The
MedPAC perspective highlights the importance
of this cost-reduction strategy and the conse-
quences of a hospitals inability to successfully
implement it.
Exhibit 2
Contribution Margins For Medicare And Privately Insured Patients In Concentrated And Competitive Markets
Payer
Knee
replacement
Hip
replacement
Lumbar
fusion
Cervical
fusion
Angioplasty
with stent
Pacemaker
insertion
Defibrillator
insertion
Hospitals in concentrated markets ($)
Medicare 190 303 207 1,818 3,346 1,937 231
Private ins. 13,731 15,938 28,185 13,020 19,554 16,452 25,694
Hospitals in competitive markets ($)
Medicare 1,700 1,023 1,575 914 2,250 4,159 4,439
Private ins. 7,529 6,732 17,195 5,946 9,496 9,282 17,370
SOURCE Authors calculations on 2008 data obtained from hospitals as part of the value purchasinginitiativesoftheIntegratedHealthcareAssociationandAspenHealth
Metrics. NOTES For definitions of concentrated and competitive markets, see Note 25 in text. These margin estimates were adjusted for patient-specific differences in
age, diagnoses, comorbidities, complications, and discharge destination, plus characteristics of the hospital where the patient was treated (procedure volume, staffed
beds, teaching status, wage rate).
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The cost-shift and MedPAC perspectives gain
increased importance in light of the proposed
reduction in Medicare payments relative to pro-
jected trends in hospital costs. The growing
federal budget deficit focuses policy attention
on Medicare spendingthe largest single con-
tributor to rising expenditures over timewhich
in turn focuses policy attention on payments to
hospitalsthe largest single contributor to ris-
ing Medicare costs.
To the extent that Medicare is able to imple-
ment serious payment slowdowns, hospitals will
be under strong pressure to find other revenue
streams or reduce their own expenditures, or
both. The key enabling factor is likely to be the
degree of concentration or competition in the
local hospital market.
The consolidation of hospitals into local and
regional chains started in response to efforts in
the 1980s by managed care firms to extract price
discounts under threat of network exclusion. It
has continued under the impetus by hospitals to
reduce their supply costs, capital borrowing
costs, and excess bed capacity. Some hospitals
have emphasized vertical integration through
employment of physicians or affiliation with
physician organizations.
The Affordable Care Act encourages the inte-
gration of physicians and hospitals as account-
able care organizations under the principle that
such integration will increase efficiency and
thereby reduce cost and price growth over time.
However, federal antitrust enforcement agen-
cies express concern that further consolidation
will increase hospitalsbargaining power.29
Conclusion
The two inevitabilities in life are said to be death
and taxes. Within the narrower scope of the
health care sector, the two inevitabilities are
Medicare payment cutbacks and further hospital
consolidation. The key policy question is
whether hospital consolidation will reduce costs
through better management of capacity, tech-
nology, and staffing or, rather, increase costs
by facilitating the price increases that permit
continued inattention to these cost drivers.
This article suggests that differing markets
will emphasize different strategies and that a
determining factor will be hospital market con-
centration. Public policy seeks both to restrain
Medicare spending and encourage provider co-
ordination. Whether these two strategies lead to
a lowering of overall cost trends or an accelerat-
ing shift in costs from public to private insurers
is the question that remains open.
This study was supported by the
California HealthCare Foundation.
NOTES
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Commission. Horizontal merger
guidelines [Internet]. Washington
(DC): DOJ; 2010 Aug [cited 2010 Sep
29]. p. 189. Available from: http://
www.justice.gov/atr/public/guide
lines/hmg-2010.pdf
21 The Herfindahl-Hirschman Index is
constructed by dividing the number
of staffed beds for each facility by the
total number of beds within the
market to obtain each hospitals
share. The share of each facility then
is squared, and the shares of all
hospitals are summed to create an
index that potentially ranges from 0
(many competitors, each with a
negligible share) to 10,000 (one fa-
cility, with 100 percent market
share). For ease of interpretation,
the index is scaled here so it ranges
from a potential low of 0 to a po-
tential high of 100.
22 For hip and knee replacement pro-
cedures, coded diagnoses included
osteoarthritis, rheumatoid arthritis,
aseptic necrosis, and fractures. For
lumbar and cervical spine fusion,
diagnoses included fracture, spon-
dylolisthesis, and intervertebral disk
disorder. For angioplasty, the
analysis was limited to patients re-
ceiving a drug-eluting stent (as dis-
tinct from a bare-metal stent or no
stent) and adjusted for the number
of stents used in the case. For pace-
maker and defibrillator insertion,
respectively, the statistical analyses
were adjusted for whether the im-
plant included a single or dual
chamber and whether the device in-
cluded cardiac resynchronization
therapy capability. Comorbidities
were defined as preexisting condi-
tions that result in an increase in the
length-of-stay by at least one day. For
orthopedic joint replacement and
spine procedures, complications
were in-hospital events serious
enough to result in at least one extra
day of hospital stay. For angioplasty,
pacemaker insertion, and implant-
able cardioverter-defibrillator inser-
tion, complications were events
serious enough to cause a shift in the
patients diagnosis-related group
(DRG) assignment (each of these
procedures has multiple DRG cat-
egories depending on whether the
patient has major complications and
comorbidities, minor complications
and comorbidities, or none).
23 Greene WH. Econometric analysis.
6th ed. Upper Saddle River (NJ):
Pearson Education Inc.; 2008.
24 The difference in revenues and con-
tribution margins was statistically
significant for all procedures
(p<0:05). The differences for costs
per case were statistically significant
at the p<0:05 level for all proce-
dures except lumbar fusion and
pacemaker insertion, for which they
were statistically significant only at
the p<0:15 level.
25 For purposes of this analysis, con-
centrated markets were defined as
those with a Herfindahl-Hirschman
Index one standard deviation above
the mean, while competitive markets
were defined as those with an index
one standard deviation below the
mean. The market-related differenc-
es were calculated by multiplying the
coefficient on the Herfindahl-
Hirschman Index variable in the
multivariate statistical regression of
contribution margin by twice the
standard deviation in the variable.
26 The difference in hospital margin
between concentrated and competi-
tive markets was statistically sig-
nificant at the p<0:05 level for all
seven procedures.
27 The market-related Medicare margin
differences were statistically signifi-
cant at the p<0:05 level for knee
replacement, hip replacement,
pacemaker insertion, and defibrilla-
tor insertion, but not statistically
different from zero for the other
three procedures studied.
28 These differences in Medicare mar-
gins between concentrated and
competitive local markets were sta-
tistically significant (p<0:05).
29 Leibowitz J. Remarks of FTC Chair-
man Jon Leibowitz as prepared for
delivery, FTC/CMS workshop on
Accountable Care Organizations
[Internet]. Baltimore (MD): Centers
for Medicare and Medicaid Services;
2010 Oct 5 [cited 2011 Jan 17].
Available from: http://www.ftc.gov/
speeches/leibowitz/101005acore
marks.pdf
JULY 2011 30:7 Health Affairs 1271
by JAMES ROBINSON on July 7, 2011Health Affairs by content.healthaffairs.orgDownloaded from
... Profit margins for angioplasty at most hospitals are about 9.5%, much higher than the average profitability of 4.3% for general hospitals (Jacobs et al., 2006). In 2008, among a sample of hospitals participating in the value-based purchasing initiative of the Integrated Healthcare Association, an angioplasty procedure would on average profit the hospital $3,000 for a Medicare patient and $14,500 for a privately insured patient (Robinson, 2011a). Patients that require more advanced PCI care bring increased profits to hospitals. ...
... The number of pacemaker insertions per year rose from 121,000 in 1993 to 189,000 in 2009 (Norton, 2012). Hospitals earn reliable profits from pacemakers; a sample of hospitals participating in the valuebased purchasing initiative of the Integrated Healthcare Association averaged about $3,000 in profits from Medicare reimbursement and $13,000 from private insurers (Robinson, 2011a). Implantable cardioverter-defibrillators (ICDs) operate similarly to pacemakers but have the ability to shock the heart during cardiac arrest to bring it back into a normal rhythm (University of Iowa, 2016). ...
... However, when such data are accessible, studies have shown that private and public insurance payment patterns in the US have often followed opposite trends within a given region [10]. In other words, persistent overbilling by certain provider segments may be indicative of underpayment by Medicare, a phenomenon that has been observed for some healthcare services [11,12] and is known as cost-shifting, where providers increase the price for private insurance to account for the shortfall from Medicare [13,14]. ...
... ASCs serve a smaller share of Medicare patients for cataract surgery compared to Ophthalmology offices. However, this is quite in contrast with private insurance where a much higher proportion of cataract surgeries are performed in ASCs [49], implying possible cost-shifting [13,14] to private insurance. ...
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... 14,19,20 Prior research has shown that hospital mergers and acquisitions are associated with substantial increases in prices for health services charged to private insurers, while hospitals in competitive markets focus more on reducing costs. 19,[21][22][23] Furthermore, hospital consolidation has been associated with reduced patient satisfaction of care. 24 Adding a single rival hospital has been shown to increase survival rates from emergency heart attacks by nearly 10%. ...
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Article
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Article
OBJECTIVE In degenerative cervical myelopathy (DCM) pathologies in which there exists a clinical equipoise in approach selection, a randomized controlled trial found that an anterior approach did not significantly improve patient-reported outcomes compared with posterior approaches. In this era of value and bundled payment initiatives, the cost profiles of various surgical approaches will form an important consideration in decision-making. The objective of this study was to compare 90-day and 2-year reimbursements for ≥ 2-level (multilevel) anterior cervical discectomy and fusion (mACDF), anterior cervical corpectomy and fusion (ACCF), posterior cervical laminectomy and fusion (LF), and cervical laminoplasty (LP) performed for DCM. METHODS The IBM MarketScan research database (2005–2018) was used to study beneficiaries 30–75 years old who underwent surgery using four approaches (mACDF, ACCF, LF, or LP) for DCM. Demographics, index surgery length of stay (LOS), complications, and discharge disposition were compared. Index admission (surgeon, hospital services, operating room) and postdischarge inpatient (readmission, revision surgery, inpatient rehabilitation), outpatient (imaging, emergency department, office visits, physical therapy), and medication-related payments were described. Ninety-day and 2-year bundled payment amounts were simulated for each procedure. All payments are reported as medians and interquartile ranges (IQRs; Q1–Q3) and were adjusted to 2018 US dollars. RESULTS A total of 10,834 patients, with a median age of 54 years, were included. The median 90-day payment was $46,094 (IQR $34,243–$65,841) for all procedures, with LF being the highest ($64,542) and LP the lowest ($37,867). Index hospital payment was 62.4% (surgery/operating room 46.6%) and surgeon payments were 17.5% of the average 90-day bundle. There were significant differences in the index, 90-day, and 2-year reimbursements and their distribution among procedures. CONCLUSIONS In a national cohort of patients undergoing surgery for DCM, LP had the lowest complication rate and simulated bundled reimbursements at 90 days and 2 years postoperatively. The lowest quartile 90-day payment for LF was more expensive than median amounts for mACDF, ACCF, and LP. If surgeons encounter scenarios of clinical equipoise in practice, LP is likely to result in maximum value because it is 70% less expensive on average than LF over 90 days.
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Chapter
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