The Affordable Care Act permanently slows the growth in Medicare hospital prices. To better understand the effects of those price cuts, we used data from ten states for the period 1995-2009 to examine the market-level relationship between Medicare prices and hospital utilization among the elderly. Regression analyses indicate that a 10 percent reduction in the Medicare price was associated with a 4.6 percent reduction in discharges among the elderly. This volume response to price cuts appears to be accomplished through hospitals' reduction in their numbers of staffed beds. They did not leave beds empty; instead, they reduced their scale of operations. Based on our results, we conclude that the Affordable Care Act will help reduce inpatient hospital utilization in the future. From a federal budgetary standpoint, lower utilization is good news, but the implications for patient care and health outcomes are not yet clear.
Keywords: Financing Health Care; Health Reform; Hospitals; Medicare.