Research examines whether financial challenges facing hospitals with large Medicare populations lead indirectly to cost shifting

Harvard researchers found evidence to suggest that hospitals with large shares of Medicare patients are at greater risk of being acquired, which can skew the market structure and lead to higher commercial prices.

A new study looks at the phenomenon of consolidation-induced cost shifting, referring to the pricing impact that ensues when hospitals serving a higher proportion of Medicare patients struggle to sustain operations.

“After controlling for many confounders, we found that hospitals with a higher share of Medicare patients had lower and more rapidly declining profits and an increased likelihood of closure or acquisition compared with hospitals that were less reliant on Medicare,” researchers with Harvard Medical School wrote in the study (login required), which was published in the August issue of Health Affairs.

The researchers posited that the resulting changes in hospital market structure could lead to higher commercial prices, especially after mergers or acquisitions. “The literature clearly demonstrates that hospital mergers raise inpatient prices, although the extent of such price increases depends on market characteristics,” they wrote.

The financial impact of larger Medicare populations

Examining 2010-16 data from 2,986 short-term general acute care hospitals — critical access hospitals were excluded from the study pool — the researchers found that 4% closed and 19% were acquired. Medicare margins fell from -4.9% to -9.7% during the study period, in part reflecting statutory constraints on annual payment increases.

Higher Medicare shares were more likely to be found at rural, nonteaching and public hospitals with healthier Medicare case mixes and lower Medicaid shares. Hospitals with high shares of Medicare patients also were more likely to have lower bed counts and lower wage indices “and to be in counties with smaller, older and slower-growing populations.”

Operating margin in 2010 was -0.38% for hospitals with Medicare shares above 65% and was 4.46% for those with Medicare shares less than 35%. By 2016, the gap had increased, with margins dropping to -3.45% for hospitals in the former category and increasing to 5.32% for those in the latter.

Among hospitals with high shares of Medicare patients, there also was a decrease of 14 percentage points from 2010 to 2016 in the number that had Altman Z scores above 1.8. A score below 1.8 indicates the organization is at risk of bankruptcy.

Implications for sustainability and prices

Based on the researchers’ analysis, a hypothetical hospital with a Medicare share of 65% had a 24% chance of closing or being acquired during the study period, compared with a 16% chance for a hospital with a Medicare share of 35% or lower.

“These results do not negate findings from the literature that suggest that lower payment leads, on average, to more efficient operation,” the researchers wrote. “Our results simply suggest that not all hospitals can reduce expenses sufficiently to continue operations. In fact, the phenomenon of hospital closure suggests that expense reduction cannot offset revenue declines for all hospitals.”

They added that given the rising financial pressure on programs such as Medicare, the right choice nonetheless may be to contain fees even at the risk of increasing hospital closures. But that approach could have consequences for commercial prices if larger health systems consolidate market power.

“An alternative is to address the problem of industry consolidation and high commercial prices directly,” they wrote. “This might entail antitrust activities to prevent acquisitions that might increase prices, other pro-competitive initiatives or regulation to limit commercial price increases. Essentially, the existence of consolidation-induced cost shifting must be a consideration in public fee setting but not a barrier to policy action.”