Acute and Rehab Hospitals May Be Viable Under Medicare Cuts

The Issue You Tackled

The Affordable Care Act (ACA) mandates Medicare payment growth rate reductions to acute and rehab hospitals and home health providers. CMS/OACT initially calculated that these reductions would cause most such providers to become unprofitable by 2040, likely leading to widespread hospital closures and adverse impacts for patients. But this calculation was simplified and ignored several dynamic factors.

What You Actually Did

During 2012-2014, we developed an SD model that addressed the dynamic factors. One of them was population aging, which along with increased insurance coverage under the ACA, may help boost provider profits by increasing volumes and revenues.

If profits still decline, then provider reactions, such as downward adjustments in their breadth or availability of services, would help providers protect themselves in terms of costs, but at the same time may hurt patients and lead to more hospital readmissions and even deaths.

The model was tested with respect to multiple uncertainties and simulates several outcome metrics of importance to taxpayers, patients, providers, and communities.

The Results

Most acute and rehab hospitals will likely maintain healthy profit margins in the coming decades despite the Medicare cuts and without the need for service cutbacks–due to the aging population, ACA insurance expansion, and the ability of most hospitals to reasonably handle somewhat higher bed occupancies than they have today. But home health agencies will not fare as well, and some will close. A worst-case scenario could start to hurt hospitals by the 2030s; but in this case the rate cuts could be phased out, and the system could be stabilized.

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INFORMS Annual Meeting

This case was presented at the INFORMS Annual Meeting in November of 2014 in San Francisco, California. Please find the slides that were used during the presentation here.