Hospital Cost Shifting

The “greater good” in the 1980s was that everyone in the US should be treated by hospitals regardless of their ability to pay for treatment.  Prior to that bit of sabotage, the uninsured could pay off the hospitals with $50 per month payments that lasted for years.

How Much Do Hospitals Cost Shift? A Review of the Evidence, by Austin B Frakt Milbank Q. 2011 Mar; 89

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Context: Hospital cost shifting—charging private payers more in response to shortfalls in public payments—has long been part of the debate over health care policy. Despite the abundance of theoretical and empirical literature on the subject, it has not been critically reviewed and interpreted since Morrisey did so nearly fifteen years ago. Much has changed since then, in both empirical technique and the health care landscape. This article examines the theoretical and empirical literature on cost shifting since 1996, synthesizes the predominant findings, suggests their implications for the future of health care costs, and puts them in the current policy context.

Methods: The relevant literature was identified by database search. Papers describing policies were considered first, since policy shapes the health care market in which cost shifting may or may not occur. Theoretical works were examined second, as theory provides hypotheses and structure for empirical work. The empirical literature was analyzed last in the context of the policy environment and in light of theoretical implications for appropriate econometric specification.

Findings: Most of the analyses and commentary based on descriptive, industrywide hospital payment-to-cost margins by payer provide a false impression that cost shifting is a large and pervasive phenomenon. More careful theoretical and empirical examinations suggest that cost shifting can and has occurred, but usually at a relatively low rate. Margin changes also are strongly influenced by the evolution of hospital and health plan market structures and changes in underlying costs.

Conclusions: Policymakers should view with a degree of skepticism most hospital and insurance industry claims of inevitable, large-scale cost shifting. Although some cost shifting may result from changes in public payment policy, it is just one of many possible effects. Moreover, changes in the balance of market power between hospitals and health care plans also significantly affect private prices. Since they may increase hospitals’ market power, provisions of the new health reform law that may encourage greater provider integration and consolidation should be implemented with caution.

Keywords: Cost shifting, Medicare, hospital charges, health insurance, health policy

The definition, existence, and extent of hospital “cost shifting” are points of debate among participants and stakeholders in discussions of health care policy and reform. The academic literature defines the term precisely and characterizes the range of its effect. Even though that literature has grown considerably in recent years, not since the mid-1990s has it been systematically reviewed and summarized (Morrisey 1993, 1994, 1996; see also Coulam and Gaumer 1991). In this article, I update those older reviews, summarize the relevant features of and changes to health care policy, and place the results in today's policy context.

That hospitals charge different payers (health plans and government programs) different amounts for the same service even at the same time is a phenomenon well known to economists as price discrimination (Reinhardt 2006). That hospitals charge one payer more because it received less (relative to costs or trend) from another also is widely believed. This is a dynamic, causal process that I call cost shifting, following Morrisey (1993, 1994, 1996) and Ginsburg (2003), among others. Price discrimination and cost shifting are related but different notions. The first depends on differences in market power, the ability to profitably charge one payer more than another but with no causal connection between the two prices charged. The second has a direct connection between prices charged. In cost shifting, if one payer (Medicare, say) pays less relative to costs, another (a private insurer, say) will necessarily pay more. Whereas cost shifting implies price discrimination, price discrimination does not imply that cost shifting has occurred or, if it has, at what rate (i.e., how much one payer's price changed relative to that of another).

That hospitals shift their costs among payers is intuitively appealing. Public payments—from Medicare or Medicaid—go down (again, relative to cost or trend, qualifiers that I will omit from now on), and as a consequence, private payments go up, taking health insurance premiums along with them. Karen Ignagni, the president and CEO of America's Health Insurance Plans (AHIP), described cost shifting as follows: “If you clamp down on one side of a balloon, the other side just gets bigger” (Sasseen and Arnst 2009, 

http://www.businessweek.com/magazine/content/09_41/b4150026723556.htm).

According to Dobson, DaVanzo, and Sen, it is a simple hydraulic effect: “As some pay less, others must pay more” (2006, 23).

Is this intuition correct? Are costs immutable and simply shifted from one payer (that pays less) to another (that necessarily pays more)? If providers shift costs, by how much do they do so? When casually expressed or generously interpreted, the idea of cost shifting conjures up a dollar-for-dollar trade-off; that is, one dollar less paid by Medicare or Medicaid results in one dollar more charged to private payers. At least one recent health insurance industry–funded report (PWC 2009) assumed this level of cost shifting.

Some health care policy stakeholders have an interest in convincing policymakers that cost shifting is both inevitable and large. Continuing the cost-shifting assumption (and ignoring a countervailing assumption of profit maximization, to which I will return later), if public payments are relatively less generous, then hospitals will raise private prices more than they would otherwise. In turn, insurers’ premiums for policies and self-insured firms’ health care costs would rise more quickly, making the private purchase and sponsorship of health care coverage relatively more difficult for consumers and firms, respectively. Thus, convincing policymakers to be concerned about cost shifting also is in the interest of the privately insured, employers, and the insurance and hospital industries, all of whom benefit from (or, at least, are not harmed by) higher public payments. Individuals and firms would rather not spend more for care, which cost shifting implies; insurance companies do not want to charge higher premiums; and hospitals would prefer higher public payments for their services.

(To read the tortured sections of this article, see website below:

https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3160596/

Comments

I support the Trump Agenda and expect to see the free market replace the welfare state. The answer is to allow the healthcare industry to crawl back from the abyss.

Norb Leahy, Dunwoody GA Tea Party Leader