Medicare Hospital Subsidies Money in Search of a Purpose - AEI Evaluative Studies

Teaching hospitals with "disproportionate" numbers of poor patients receive special subsidies under Medicare, above and beyond the standard payments that all hospitals receive for treating Medicare patients. In recent years these subsidies have been criticized both both for raising health care costs and for lacking evidence that they achieve the policy objectives used to justify them. In fact, the subsidies create perverse incentives for hospitals to train more physicians, close beds, and treat fewer uninsured patients. In response to such criticism, the Balanced Budget Act of 1997 corrected some of the flaws in the teaching hospital subsidy but essentially left untouched the subsidies to hospitals that treat large numbers of poor patients. The costs of the latter subsidies remain unchecked, and the program's design still penalizes hospitals for admitting uninsured patients. This study review the rationales, legislative history, and financial incentives of both types of hospital subsidies. After this detailed analysis, the author suggest alternative designs for the programs that could curb their costs and ensure that they actually achieve the goals for which they were created.