Picture 12 There is a pervasive notion that providers of health care can make up for lower payments received from one set of payers (e.g. Medicare, Medicaid, uncompensated care) by increasing prices charged to other payers (e.g. private insurance companies). To the extent it occurs cost shifting offsets attempts to control overall health care costs through reduced fees paid by public insurers. It makes “bending the cost curve” harder.

However, it is a myth that providers can fully shift costs. That they could do so violates, in most cases, principles of economics. Moreover, empirical evidence suggests cost shifting, where it occurs, is done so a minimal level: only a small fraction of decreased payments by public payers shows up as an increase in charges to private payers. Losses associated with one payer are largely not recouped from another.

Some take price discrimination as evidence of cost shifting. However, price differentials are not necessarily the recouping of losses from one payer by overcharging another. As described in the 2001 Health Affairs paper by Richard Frank “Prescription Drug Prices: Why Do Some Pay More Than Others Do?” price discrimination can be due to unequal bargaining power across classes of purchasers. In other words, in maximizing profits, providers charge different prices to different market segments. In such cases, by definition, profits cannot be further increased by cost shifting.

It’s true that cost shifting could theoretically occur under specific conditions. One case is when a provider has monopoly power that it has not fully exploited, for instance charging private insurers less than it could. More fully exploiting its monopoly power with respect to those payers, such a provider can recoup losses. Still, there is a limit to how much of the lost revenue can be recouped. The monopoly profit-maximizing price level imposes a ceiling.

Another instance in which cost shifting could occur is in a more competitive market in which all providers have roughly the same level of undercompensated care. All competitors in such a market might choose to increase charges to private insurers by the same amount, maintaining their relative competitive positions. However, if one competitor elects to reduce costs or reduce its burden of undercompensated care, it might be able to charge private insurers less then others, thereby increasing its market share. So, cost shifting may not be a stable equilibrium.

The literature provides estimates of the extent of cost shifting in cases where it is theoretically possible. The March 2009 MedPAC Report to Congress: Medicare Payment Policy (Chapter 2A) includes a summary of such evidence. It concludes that the dominant dynamic in the market is that hospitals with strong market power have abundant financial resources. In turn they have a high cost structure (perhaps due to provision of relatively higher quality care) that causes lower or negative Medicare margins. In contrast, hospitals that are forced to run efficiently are adequately funded by Medicare payments. That is, Medicare payments are sufficient to cover costs but some hospitals run inefficiently and make it appear otherwise. Therefore, MedPAC has concluded that increased Medicare payments to hospitals would not reduce rates charged to private insurers. The primary effect would be to induce lower cost operations.

The MedPAC report cites mixed evidence from the literature on the level of cost shifting, as does the December 2008 CBO report Key Issues in Analyzing Major Health Insurance Proposals. A few studies from the 1980s found evidence of cost shifting at a rate of up to fifty cents on the dollar. However, conditions in the 1990s were less conducive to cost shifting and the rates were found to be on the order of a 0.4 to 1.7 percent increase in private payments in response to a 10 percent reduction in Medicare and Medicaid fees. In a 2005 study of geographic variation in health costs of the Federal Employees Health Benefits Program, the GAO concluded that the considerable variation it found was not due to variations in payments from other payers.

In conclusion, cost shifting is not as large and widespread a phenomenon as some would believe. Under some market conditions it is inconsistent with economic theory. And, while it can occur under other market conditions it is far from a dollar-for-dollar shift in costs. The most recent studies of the phenomenon find little evidence of cost shifting or very low levels of it. Claims that reductions in public payments for health care will necessarily show up as commensurate increases in private payments are unfounded.

Austin Frakt blogs at The Incidental Economist and is a health economist and principal investigator with the Department of Veterans Affairs’ Health Services Research and Development Service and assistant professor with the Boston University School of Public Health, Department of Health Policy and Management. The views expressed in this post are his alone and do not necessarily reflect the positions of Boston University or the Department of Veterans Affairs.

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58 Responses for “The Health Care Cost Shifting Myth”

  1. GTWMA says:

    Looks like my reply was eaten, so I’ll try again. So, Medpac studies don’t fly here, but incomplete summaries of the literature from nearly two decades ago by trade journals do fly? Sorry, but I know a few of the Medpac commissioners, and I’ll trust their efforts a hell of a lot more than Entrepreneur magazine.
    Entrepreneur’s summary has one thing right. Those studies found that in the early 1980s, immediately post-PPS, there was some evidence of this type of dynamic cost-shifting (to differentiate from the static price discrimination cost-shifting that Austin began with in his note). Even those studies found that a 10% cut in Medicare prices only led to a 3-4 percent increase in private prices. And they found that even as the 1980s ended and the 1990s began, the effect became weaker and weaker–both smaller and bordering on being statistically insignificant. And all of these these studies ended their analysis with data that predated the growth of managed care.
    For dynamic cost-shifting to happen, economic theory suggests that ther have to be two conditions. First, providers must have market power compared to private insurers. Second, they must not be fully exploiting that market power to begin with.
    Most economists agree that this was a reasonably accurate description of the situation in the 1980s. But, very few think it’s true in the 1990s or 2000, as insurers consolidated, reducing comparative market power of providers, and as competition increased and reduced the ability or willingness of providers to less than fully exploit whatever market power they had left. As a result the most recent study (Zwanziger and Bamezai 2006), which analyzed data through 2001, showed that there was no significant cost shift from Medicaid and that the Medicare cost shift had shrunk to less than half of what it had been in the 1980s.
    And not a single one of these studies accurately deal with the fact that the simple price comparison is inappropriate, because it fails to account for public support of capital costs.
    The data on hospital profitability that I cited comes directly from the AHA–if anything, they are under-representing the profits from Medicare among hospitals.
    Who besides Medicare says Medicare pays a fair price? Well, I count on what people actually do, rather than what they say they might do if Medicare cuts their rates by 10 percent (hey, notice that the doctors did not say they would just raise private prices to offset the Medicare cuts on their income–seems to me that contradicts your cost shifting argument!).
    And, the data from Medpac clearly shows that doctors are not voting with their feet and leaving Medicare in droves. And, despite your polemics, that is the third option open to every doctor and hospital that you ignore.
    The costs that are often cited in these complaints about Medicare are horribly inflated fictions of what some hospitals would like to receive if they could go back to the world of cost+ reimbursement. The reality is that there are thousands of hospitals and hundreds of thousands of doctors and physician groups who have made their practices more efficient and make a profit on Medicare. The question should not be why Medicare won’t pay inefficient providers more. It should be why more providers are not working as hard as the others to become more efficient in their processes of care.

  2. Nate says:

    And, the data from Medpac clearly shows that doctors are not voting with their feet and leaving Medicare in droves.
    The threatened medicare cuts have also been passed off every time they come up. It is a bankrupt system refusing to take the action necessary to save it that knows when they do take needed action the providers will walk

  3. Michael says:

    Unbelievable…the idea the cost-shifting is a myth. Ignorant or deliberate obsfucation: you choose.
    You want to understand the reality of cost-shifting? Look at Aetna’s miraculous turnaround from the brink of extinction. It’s a case study in how cost shifting really works.

  4. Don Mehus says:

    If you had done your home work and consulted with providers your blog would be credible, but suggesting that cost shifting it is a myth, only confirms the fact you are a non factor.

  5. juandos says:

    Thank you for lying about cost shifting…
    Treating uninsured individuals costs approximately $164 billion each year. That figure is paid primarily by taxpayers and private entities.
    The U.S. spends nearly $100 billion per year to provide uninsured residents with health services, often for preventable diseases that physicians could treat more effectively with earlier diagnosis.

  6. Lon says:

    Cost shifting is alive and well in Wisconsin. Our (unscientific) research indicates that all area nursing homes use cost-shifting to the tune of 20-30%. If the law required private pay to be the same as Medicaid, Medicaid would no longer have the luxury of a select group of private citizens paying what is a Medicaid responsibility. True, Medicaid costs would rise to make up the difference, but at least *all* of the public would be paying for those public services. Medicaid might also be a little more vigilant when they no longer have a captive group to absorb some of their costs.

  7. Bob Horton says:

    It seems to me that this dialog, and most other “cost shifting” dialogs, myopically overlook the full public cost of providing care to non-insured and underinsureds. The significant costs of providing health care at county hospitals and in the ER’s of non-profit and for-profit hospitals seems to be totally overlooked in these discussions.

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