Cost Shifting or Cost Cutting?: The Incidence of Reductions in Medicare Payments

Abstract

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide range of content in a trusted digital archive. We use information technology and tools to increase productivity and facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org. This paper examines how reductions in hospital payments by Medicare affect hospital operations. I look at two episodes of payment reductions: the late 1980s and the early 1990s. I find a large difference in the impact of payment reductions in these two time periods. In the 1980s, reduced Medicare payments were offset dollar for dollar by increased prices to private insurers. In the 1990s, however, payment reductions result in lower hospital profits, which must ultimately reduce hospital costs. Hos pitals have responded to the payment reductions by reducing the num ber of beds and nurses, and sometimes by closing entirely, but not by reduced acquisition of high-tech equipment.