Putting Medicare in Context: How Does the Balanced Budget Act Affect Hospitals?

PUTTING MEDICARE IN CONTEXT:HOW DOES THE BALANCED BUDGET ACTAFFECT HOSPITALS?Stuart GutermanPrincipal Research AssociateHealth Policy CenterThe Urban InstituteJuly 2000The author is grateful to the National Health Policy Forum for its support in producing this paper. The analysis presented in the paper also was supported by the Urban Institute and the Council onthe Economic Impact of Health System Change. The opinions expressed herein are the author'salone and do not necessarily reflect those of the Urban Institute or the other organizations thatsupported this work. Any errors contained in the paper similarly are the author's soleresponsibility. 2PUTTING MEDICARE IN CONTEXT:HOW DOES THE BALANCED BUDGET ACT AFFECT HOSPITALS?When it was enacted, the Balanced Budget Act of 1997 (BBA) was expected to produce $112billion in Medicare savings in the first five years (federal fiscal years 1998 through 2002),reducing the projected annual growth rate in program spending from the 8.8 percent baselineestimate to 5.6 percent (Congressional Budget Office 1997). In fact, Medicare spending hasgrown much more slowly than anticipated: by March 1999, estimated spending for that five-yearperiod was $84 billion less than was expected when the BBA was enacted, and the annual rate ofincrease was down to 3.9 percent (Congressional Budget Office 1999). There was particularconcern about declines in payments for hospital inpatient, skilled nursing facility (SNF), andhome health agency (HHA) services, as well as disruptions in the new Medicare+Choice programthat was intended to offer expanded private plan options to Medicare beneficiaries (MedicarePayment Advisory Commission 1999).In response to this concern, the Congress passed the Balanced Budget Refinement Act of 1999(BBRA), which modified some of the provisions in the BBA that affected payments to providersand plans, adding an estimated $11 billion to Medicare spending in fiscal years 2000 through2002. Despite this legislation, the latest estimate of program spending in the first five post-BBAyears has fallen another $28 billion; estimated Medicare spending for this period is therefore atotal of $224 billion (18.2 percent) below the original baseline projection (Congressional BudgetOffice 2000). This has raised questions about the impact of reduced Medicare payments on thecontinued viability of the providers and plans that serve the program's beneficiaries.Comparing trends in estimated Medicare payments with a budget baseline, however, does notnecessarily indicate the real impact of the policy changes that have taken place since the BBA. First, "savings" do not necessarily indicate actual reductions in payment levels, although theyfrequently are misinterpreted that way; they only indicate that spending will be lower than ifcurrent law were unchanged. Second, the baseline projection--which is based on the assumptionthat current law and regulations will continue indefinitely--frequently is an artifact of the budgetprocess. Current law often includes provisions that never were intended to take effect, but wereincluded in previous legislation to inflate future spending estimates and provide easy "savings" insubsequent legislation.Third, the impact of any change in Medicare provider payments can be meaningfully evaluatedonly by examining the corresponding costs incurred by those providers. (Of course, not only theactual but also the appropriate level of costs must be considered.) Finally, Medicare does notfunction in isolation, but as part of an intricate pattern of cross-subsidization among payers,providers, patients, and services. As this pattern shifts over time, the effects of individual policychanges may also vary, and assessing their implications may be more complex than first appears. 3This paper focuses on the effects of the recent changes on the nation's hospitals, including bothacute care inpatient facilities and the growing number of other facilities that are part of hospital-based systems. In fiscal year 2000, hospital inpatient and outpatient services account for $100billion in Medicare fee-for-service benefit payments--almost three-fifths of the total for theprogram. Moreover, in addition to these acute care services, the variety of post-acute and otherservices provided by hospital-based facilities account for another $26 billion in Medicare fee-for-service payments.1 Therefore, although the site of care has shifted from the inpatient to othersettings, hospitals still are involved in the vast majority of care received by Medicarebeneficiaries.The objective of this analysis is to put the changes brought about by the BBA (and the BBRA) ina broader context.2 First, this paper briefly reviews the circumstances that prevailed at the timethe legislation was being formulated and debated, and discusses the rationale for its provisions. Then, an estimate of the impact of the BBA on the adequacy of payments under Medicare's acutecare hospital inpatient prospective p