Cost Shifting or Cost Cutting? The Incidence of Reductions in Medicare Payments

This paper examines how reductions in hospital payments by Medicare affect hospital operations. I look at two episodes of payment reductions: the late 1980s and the early 1990s. I find a large difference in the impact of payment reductions in these two time periods. In the 1980s, reduced Medicare payments were offset dollar for dollar by increased prices to private insurers. In the 1990s, however, payment reductions result in lower hospital profits, which must ultimately reduce hospital costs. Hospitals have responded to the payment reductions by reducing the number of beds and nurses, and sometimes by closing entirely, but not by reduced acquisition of high-tech equipment.