How do reimbursement rates affect quality? One school of thought holds that decreased reimbursement decreases quality in the short-run and decreases innovation in the long-run. Another school of thought believes that there is so much inefficiency in the health care system, that reducing reimbursement rates will have no affect on quality. Which answer is correct?
A study by Wu and Shen (2014) aims to answer this question by examining the long-run impact on quality of the reimbursement rate reductions from the Balanced Budget Act of 1997 (BBA). Why is the BBA so important?
With the exception of the Prospective Payment System (PPS), the BBA is the only legislation that reduced Medicare inpatient payments in nominal terms, rather than just slowing down the growth rate. Second, BBA payment cuts could have a long-lasting effect on hospitals because the legislation not only reduced diagnosis-related group (DRG) payment levels between 1998 and 2002 but also permanently altered the formula for special add-on payments [i.e., DSH and IME payments]…Third, Medicare BBA reductions occurred after a sustained period of declining inpatient admissions and lengths of stay, as well as aggressive payment negotiations from managed care plans (Wu 2009) that limited hospital ability to cost shift to private payers.
Using MedPAR data between 1995 and 2005, the author uses a DDD design. They compare “…the relative change in mortality trends between large- and small-cut hospitals before and after the BBA.” They find that:
…the BBA generated long-term financial pressure to hospitals that extended beyond the BBA implementation period. While there is a general declining trend in AMI mortality rate, Medicare patients treated at hospitals facing a large degree of such fi nancial pressure experienced smaller improvement in mortality outcomes relative to patients treated in small-cut hospital, not in the short run, but in the longer run post-BBA period. The elasticity of the effect, while small ( 0.2), is constant and consistently observed from 7-day to 1-year post hospitalization…hospitals responded to BBA cuts by reducing operating costs per bed immediately after the BBA took effect, and such effort involved a reduction in staffing, particularly among registered nurses.