Vivian Wu Examines the Mortality Cost of Medicare Payment Cuts Under the ACA

Medicare Payment Cuts Under the ACA May Come at a High Cost

By: Jeremy Loudenback, MPP Candidate, USC Sol Price School of Public Policy

Reductions in Medicare payments for hospitals may lead to less improvement in patient mortality outcomes, according to a recent paper published in Medical Care by Yu-Chu Shen of the Naval Postgraduate School and Vivian Wu, Schaeffer Center researcher and assistant professor at the Sol Price School of Public Policy.

The impact of Medicare payment cuts has looming implications for the implementation of the Affordable Care Act (ACA). In trying to assess the impact of potential long-term reductions in Medicare payments, Wu and Shen examined similar cutbacks that took place under 1997’s Balanced Budget Act (BBA). The BBA presents an excellent opportunity to assess the relationship between payment reductions and patient outcomes, an issue that has been discussed with the ACA’s projected cuts in hospital payments.

In looking at the effect of changes in Medicare hospital payments implemented with the BBA in 1997 (and taking into account subsequent policy adjustments), the duo found that reductions in payments were linked to smaller reductions in one-year patient mortality rates as well as significant bottom-line savings. The researchers make clear that planning for cost savings from reduced payments may call for challenging conversations about the dollar costs of lives and difficult tradeoffs.

“In our analysis, a reduction in Medicare payments saved $7.26 billion, at the expense of 39,477 lives, or about $184,000 per life lost,” said Wu. “Some may argue that it’s a costly intervention while others may think it’s worth it. Regardless of what one might think, we need to bring these numbers to the table and be transparent about the tradeoffs we are making.”

While the BBA shrank Medicare payments to hospitals by 5%  from 1998 to 2000, the ACA will reduce diagnosis-related group payments over a considerably more substantial scale: 1.1% a year, indefinitely. The comparison is not perfect, but it does demonstrate that gaps in quality between hospitals may be related to how much they are being paid.

The cuts mandated by the BBA led to a persistent Medicare payment gap between hospitals, and hospitals facing larger payment cuts experienced less improvement in mortality rates for four out of five conditions examined (acute myocardial infarction, congestive heart failure, stroke, and pneumonia).  According to Wu and Shen, many hospitals were able to absorb lower revenue associated with the new Medicare payments for short periods of time, but the impact of universal Medicare cuts on mortality rates became more pronounced over a longer-term perspective.

Instituting broad, one-size-fits-all payments for Medicare might be a quick fix with dangerous implications for health outcomes if prevailing assumptions about waste in the healthcare industry are accepted without closer scrutiny.

“Inefficiency is not a universal phenomenon,” Wu said. “This type of broad payment cut could contribute to widening gaps in quality between healthcare organizations.”