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How Will Hospitals Be Affected by Health Care Reform?

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Document date: July 15, 2010
Released online: July 19, 2010


The roughly 30 million newly insured Americans will generate about $40 billion in new revenues for all hospitals by 2019, about twice as much as the Medicare payment cuts and the reductions in payments that will be made to offset the reduced costs of uncompensated care. For the most part, the payment changes that affect hospitals represent a modest move in the direction of paying for value rather than volume. More substantial changes, such as using forms of global payments to produce more fundamental alterations in hospitals’ business model will be tested in pilots and demonstrations.

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Given how many sectors make up the hospital industry, including nonprofit and for-profit community hospitals, teaching hospitals, and safety net hospitals, it is likely that the effects of reform will not be felt uniformly across all hospitals. Some types of hospitals have historically provided more care to uninsured patients, and these hospitals are likely to gain the most in terms of revenue increases for the mostly uncompensated care they have been providing to these patients. Analysis we have done based on results from an Urban Institute microsimulation model suggests that the roughly 30 million newly insured Americans would generate approximately $40 billion in new revenues for all hospitals by 2019. However, the coverage expansions were paid for, in part, by hospitals agreeing to accept slower growth in Medicare payment rates and to forgo certain special payments that have been made under Medicare and Medicaid to offset the costs of uncompensated care. The Congressional Budget Office’s (CBO) projections of the amount of these forgone revenues suggests that, as a group, hospitals will not be giving up very much more, if any, revenues than they will gain from newly insured patients (discussed below).

Some criticism of the legislation as it relates to hospitals, e.g., from leadership at the Mayo Clinic, has focused on the lack of broad-based and decisive change in payment approaches under Medicare, particularly related to not altering the basic inpatient payment method based on diagnosis-related groups. Although there are a number of mandated pilots of new payment models, for the most part, they would build on established payment methods and provide incentives at the margin for altering behavior, e.g., for reducing rates of readmissions while still receiving payment for the readmissions. Even under the mandated "shared savings" approach to testing accountable care organizations (ACOs), hospitals remain profit centers with a strong business case for keeping beds full and employing service-line strategies for generating volume, contributing to what some have called a "medical arms race."

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Topics/Tags: | Health/Healthcare | Poverty, Assets and Safety Net

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