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Do Hospitals “Cost Shift” to the Privately Insured when Medicare Reduces Prices?

Posted Mar 23 2010 9:30am

Many health policy experts believe that when Medicare or Medicaid decrease prices, hospitals will increase the prices they charge to the privately insured.

Does this make sense?  Ginsburg (2003) summarizes the debate:

Most executives in hospitals, physician organizations, health plans, and businesses have long been convinced that reductions in rates paid to Medicare and Medicaid lead directly to higher payment rates charged to private payers. But most economists who have published on the topic express strong skepticism about the possibility that cost shifting can and does occur.  Not only do they point to empirical analyses that fail to obtain results supporting the existence of cost shifting, they also argue that cost shifting is conceptually impossible. The crux of their argument is the question of why providers with the ability to increase revenue through increases in prices to private payers would not have already exhausted such capacity prior to reductions in payment rates.

Ginsburg argues that cost shifting can occur.  Many hospitals are non-profits whose goal is not profit maximization.  Instead, they may try to maximize the quantity of patient care subject to a constraint of fiscal solvency.  The board of directors for many hospitals is made up of community leaders and physicians rather than managers, which further dilutes the profit motive.  When Medicare or Medicaid reduces reimbursement rates, non-profits may increases prices charged to private insurance companies to insure that they will break even.  Additionally, for-profit hospitals may also be able to raise the rates they charge private insurers only after a Medicare or Medicaid fee cut because they must compete with non-profit hospitals on price.

Although Ginsburg offers a compelling argument that cost shifting could occur, he does not provide empirical evidence that it does occur in reality.

In a related article, Lee et al. (2003) argues that cost shifting does occur and relates 4 findings:

  1. Medicare’s early (pre-prospective) payment policy was a boon to hospitals.
  2. Medicare payment policy is a “top-down” affair, driven by budgetary and special-interest politics.
  3. Federal policymakers may not consciously consider cost shifting, but state policymakers do.
  4. Medicare payment policy requires constant adjustment, but we are “getting it right” most of the time.

This findings may be true, but I do not know how reliably hospital costs can be attributed to private pay versus public pay patients.  Hospitals have significant fixed costs and may allocate a larger share of fixed costs to their public-pay patients to make it seem that treating them is an onerous burden and the government needs to increase reimbursement levels.  In fact, in one chart, Lee and compare hospital margins between private and public/non-paying patients, but there is no reason why non-paying patient margins should be lumped into the cost of treating publicly insured patients.  Thus, these four conclusions should be viewed with a healthy dose of skepticism.

Michael Morrisey (2003) provides another explanation:

Yes, health care providers charge different prices to different payers. No, this is not cost shifting. Airlines, hotels, movie theaters, even my local Lowe’s Home Improvement Center charge different prices to different buyers. These actions are artifacts of having some degree of market power, but they would constitute cost shifting only if the hotel, for example, raised its price to me because it lowered its price to the convention group…there is no reason to necessarily believe that the health care provider loses money that had to be made up when it accepted a lower price from one group of buyers.

Morrisey argues that the focus on cost shifting is not the source of the problems; the lack of a competitive hospital market is the real issue. Morrisey recommends enforcing anti-trust laws, eliminating certificate of need (CON) laws, and repealing any-willing-provider laws. I agree that these are sensible solutions.

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