Hospital Responses to Medicare Reimbursement Rate Changes: New Evidence from Medicare's Rural Floor

Abstract

Hospitals face an environment of declining real per-patient reimbursement from Medicare. Understanding the provider response to changing Medicare prices is critical for balancing the complex incentives of hospitals and patients with the fiscal and social objectives of the public insurance program. In this paper I exploit the Medicare rural floor, a discontinuity in geographic adjustments to Medicare payments to hospitals, in a regression kink design to estimate the impact of Medicare reimbursement rate changes on the level and mix of hospital services provided. I find that hospitals respond to higher Medicare reimbursement by admitting more Medicare patients, but that the average duration of a patient stay declines. I also document a previously unstudied spillover of Medicare reimbursement on the volume of admitted patients with non-Medicare insurance. Contrary to the prediction of existing standard models, both Medicaid and private patient utilization significantly increase in response to Medicare rate hikes. Higher Medicare prices coupled with higher utilization across all patient categories leads to a large increase in hospital revenue. Hospitals deploy the revenue, almost exclusively, in expenses for patient care.