The Impact of Profitability of Hospital Admissions on Mortality

Given the fiscal constraints of the Medicare program, policy makers will continue to be faced with the challenge of implementing policies to control expenditures. In this study, we simulate the effect of policies that reduce Medicare reimbursement relative to costs on 30-day mortality rates. If overall Medicare reimbursement levels are reduced, then hospitals may be forced to reduce resources directed to patient care and quality improvement. If such reductions are large enough, patient outcomes could be adversely affected. As policy makers consider such changes, a central question is to what extent quality of patient care will be affected by lower reimbursement. It has long been recognized that hospitals faced with reductions in reimbursement may reduce quality of care, particularly in clinical contexts in which clinical quality is difficult to assess by most consumers (Arrow 1963; Weisbrod 1989; Dranove and Satterthwaite 1992). Much of the recent evidence about the relationship between hospital finances, costs, and quality has focused primarily on treatment for specific conditions, such as acute myocardial infarction (AMI), a common, high-mortality condition for which treatment is generally considered profitable (Kessler and McClellan 2000; Gowrisankaran and Town 2003; Shen 2003; Volpp et al. 2005b; Schreyogg and Stargardt 2010). However, several theoretical and empirical studies have shown that a provider's response to reduced payment depends upon whether an admission is expected to be profitable (Hodgkin and McGuire 1994; Ellis 1998; Meltzer, Chung, and Basu 2002; Lindrooth, Bazzoli, and Clement 2007). This suggests that evaluating the response of hospitals to reductions in provider reimbursement using only outcomes in profitable conditions may provide a misleading sense of the effect of changes in reimbursement on quality and reimbursement/quality trade-offs for unprofitable conditions. This study aims to fill a gap in the recent literature by examining changes in average payment generosity across conditions with a range of profitability and to simulate the effect of alternative reimbursement policies on mortality. We borrow the term “payment generosity” from a study that examined trends in Medicare reimbursement and costs between 1987 and 1990 (McClellan 1997). Payment generosity refers to the average profitability of an admission to a service line relative to its average cost. This measure takes into account the cost of delivering a service, whereas reimbursement reflects only the level of payment for an admission regardless of its cost. The simulations of the impact of alternative reimbursement policies on mortality are conducted using estimates of the relationships between payment generosity and 30-day mortality.