Hospitals Will Adjust Long-Term Operating Expenses Due to PPACA Medicare Cuts

A 2013 study by Health Services Research (HSR) has found that Medicare price cuts in the Patient Protection and Affordable Care Act (PPACA) will significantly slow the growth in hospitals’ total revenues and operating expenses, but that hospitals do not appear to be making up for these cuts by cost shifting, but by adjusting their operating expenses over the long run. According to HSR, the claim that large numbers of hospitals will be driven to insolvency by the PPACA cuts appears to hold true only for for-profit hospitals. During the time period of its study, HSR found that not-for-profit hospitals were able to fully adjust their operating expenses to match their newly constrained revenues.


The objective of the study was to estimate the effects of changes in Medicare inpatient hospital prices on hospitals’ overall revenues, operating expenses, profits, assets, and staffing. The study involved the analysis Medicare hospital cost reports from 1996 to 2009.


For each hospital, HSR quantified the year-to-year price impacts from changes in the Medicare payment formula using cumulative simulated price impacts as instruments for Medicare inpatient revenues. HSR used a series of two-stage least squares (2SLS) panel data regressions to estimate the effects of changes in Medicare revenues among all hospitals, and separately among not-for-profit versus for-profit hospitals, and among hospitals experiencing real price increases versus decreases.


The study reaches three conclusions: (1) hospitals’ total revenues will drop under the PPACA by more than expected based just on the Medicare price changes; (2) hospitals will offset about 90 percent of lost revenues by reducing operating expenses, accomplished mainly through savings on personnel, but also through savings on non-personnel costs; and (3) hospitals will delay or forgo capital improvements.

Flexibility of Operating Expenses

The study notes that there are two broad viewpoints on hospitals’ revenues and financial condition: (1) that hospitals’ operating expenses and output are inflexible and that hospitals facing Medicare cuts must either recoup lost revenues from private payers or go out of business; or (2) that hospitals’ operating expenses are fairly flexible and can expand or contract depending on resource availability. HSR’s believes its analysis supports the second viewpoint and concludes that hospital operating expenses can expand or contract as necessary.

Implications of Flexibility

According to HSR, this ability to expand or contract operating expenses as necessary has three implications: (1) that the PPACA price cuts will help bend the hospital spending curve downward and repealing those price cuts would bend it back upward; (2) hospitals are revenue-seekers who adjust costs and quality up or down so as to roughly equal whatever revenues they manage to obtain; and (3) that hospitals’ ability to increase productivity is not known because it has not really been tested.