Does Hospice Care Reduce Medicare’s cost for end-of-life care?

Historically, Medicare recipients in their final year of life generated about six times the expenditures of the average surviving Medicare enrollee and accounted for almost 30 percent of total program spending. However, in the late 1980s, a confluence of two forces helped increase the use of hospice care among Medicare beneficiaries.

First, in 1984, Medicare instituted the Prospective Payment System (PPS). Hospitals began receiving fixed payments for each admission based on patient diagnosis (DRG). Thus, hospitals had an incentive to move long-term care patients to alternative facilities, such as hospices. Secondly, in 1988, the Duggan v. Bowen court ruling held that the HCFA (now CMS) had to expend their interpretation of home health benefits. Soon after, Medicare began to cover more hospice and home health services. Because of these two forces, the supply of home health services and hospices boomed.

Did the rise in popularity of hospice decrease Medicare’s end-of-life expenditures? A paper by Garber, MaCurdy and McClellan find that the answer is no.

Hospice and home health care did substitute for some inpatient hospital services. Between 1988 and 1995, “the percentage of Medicare recipients who died in an acute hospital fell from about 42 percent to less than 35 percent. The percentage who died without any Medicare-covered services fell much more dramatically, from about 40 percent in 1988 to about 25 percent in 1995.” Hospice care rose from about 2% in 1988 to 10% in 1995.

This growth in the utilization of hospice care was strongest in patients who had chronic diseases such as lung cancer. Predictably, individuals who died of sudden illnesses such as acute myocardial infarction (AMI) or hemorrhagic stroke did not increase their use of hospice care.

However, although the hospice care did substitute for inpatient hospital care expenditures for end-of-life medical continued to increased. “…per-decedent total expenditures in the final month of life rose from about $5,400 in 1988 to $7400 in 1995, expressed in 1995 dollars.” Even though inpatient hospital utilization decreased at the end of life, the cost of this care increased dramatically. For instance, for patients who died of AMI—where inpatient hospitalization at the end of life varied little over time—the cost of care in the final month of life rose by nearly 50 percent in real terms between 1988 and 1995.

In summary, although hospice utilization increased and inpatient hospital care decreased, “the simultaneous rise in the use of hospice and other services, however, meant that the number of days that patients received Medicare-covered services rose between 1988 and 1995.” the net effect of these changes in utilization was an increase in monthly Medicare expenditures before death, rising from about $5,500 in 1988 to more than $7,000 in 1995 (in 1995 dollars).


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