Hospital resource allocation decisions when market prices exceed Medicare prices

Objective: To examine nonprofit hospitals' financial and spending allocations when the private sector payment rate is higher than the Medicare's payment rate. Data Sources: Hospital financial data for 2014–2018 from Center for Medicare and Medicaid Services Hospital Cost Reports, hospital characteristics from the American Hospital Association (AHA) Annual Survey. Study Design: Hospital and year level fixed effects regressions modeling each hospital's (1) operating net income per discharge equivalent (DE); (2) administrative cost per DE; (3) patient care cost per DE; (4) registered nurse per bed; charity care cost per DE; and (5) provision of unprofitable services as a function of the private sector to Medicare payment ratio (PMR). Data Collection/Extraction Methods: Hospital/year-level data from hospital cost reports merged with AHA data. Samples included general short-term hospitals with nonprofit ownership, excluding critical access hospitals. Principal Findings: The final sample included a total of 8862 hospital-year observations, with a mean PMR of 1.62. Nonprofit hospitals having a 0.1 higher PMR were associated with $257 (95% CI: $181–$334) increase in operating net income per DE; $66 (95% CI: $32–$99) increase in administrative cost per DE; $170 (95% CI: $120–$220) increase in patient care cost per DE; and $18 (95% CI: $10–$25) increase in charity care cost per DE. We found hospitals hired 0.86 (95% CI: −0.08 to 1.81) more registered nurses per 100 beds, but no evidence on providing more beds for unprofitable services, such as obstetric care, burn care, alcohol/drug abuse treatment, or psychiatric care. Conclusions: Higher private sector prices led primarily to greater surplus and administrative cost for nonprofit hospitals and smaller increases in spending on services that will directly benefit patients.