How do hospitals cope with sustained slow growth in Medicare prices?

To estimate the effects of changes in Medicare inpatient hospital prices on hospitals' overall revenues, operating expenses, profits, assets, and staffing.

Medicare hospital cost reports (1996-2009).

For each hospital, we quantify the year-to-year price impacts from changes in the Medicare payment formula. We use cumulative simulated price impacts as instruments for Medicare inpatient revenues. We use a series of two-stage least squares panel data regressions to estimate the effects of changes in Medicare revenues among all hospitals, and separately among not-for-profit versus for-profit hospitals, and among hospitals experiencing real price increases ("gainers") versus decreases ("losers").

Medicare price cuts are associated with reductions in overall revenues even larger than the direct Medicare price effect, consistent with price spillovers. Among not-for-profit hospitals, revenue reductions are fully offset by reductions in operating expenses, and profits are unchanged. Among for-profit hospitals, revenue reductions decrease profits one-for-one. Responses of gainers and losers are roughly symmetrical.

On average, hospitals do not appear to make up for Medicare cuts by "cost shifting," but by adjusting their operating expenses over the long run. The Medicare price cuts in the Affordable Care Act will "bend the curve," that is, significantly slow the growth in hospitals' total revenues and operating expenses.