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The Health Care Cost Shifting Myth

By AUSTIN FRAKT

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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Bob HortonLonjuandosDon Mehusweb royality Recent comment authors
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Bob Horton
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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.

Lon
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Lon

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… Read more »

juandos
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juandos

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.

Don Mehus
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Don Mehus

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.

web royality
Guest

nice posting it is….
http://www.webroyalty.com

Michael
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Michael

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.

Nate
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Nate

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

GTWMA
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GTWMA

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… Read more »

Nate
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Nate

http://www.entrepreneur.com/tradejournals/article/114982248_2.html Why is it we should dismiss all of these studies? Another possibility for hospital managers to compensate for reduced Medicare payments existed by which the charges were (generally) a tree reflection of costs, the percentage paid by Medicare declined, and then Medicare patients were cross-subsidized from other revenue sources, most likely private insurance (which could account for recently escalating premiums for private health insurance). There is certainly a historical precedent for this kind of cross-subsidy by private payers (cost shifting by hospitals) to compensate for underpayments by Medicare (Guterman 2000), so this was a likely scenario. Ginsburg (2002), Dobson… Read more »

Nate
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Nate

GTWMA what studies are you referring to? And MedPac studies don’t fly here. First off even if you aren’t seeing new patients it pays 5% more to sign the annual agreement; “The Medicare payment amount for PAR physicians is 5% higher than the rate for non-PAR physicians.” Not to Mention; “Carriers provide toll-free claims processing lines to PAR physicians and process their claims more quickly.” “Limiting charges for non-PAR physicians are set at 115% of the Medicare approved amount for non-PAR physicians. However, because Medicare approved amounts for non-PAR physicians are 95% of the rates for PAR physicians, the 15%… Read more »

GTWMA
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GTWMA

Nate explain to me why half of hospitals report they make a profit on Medicare. If Medicare payments are so inadequate, explain to me why the percentage of physicians who say they accept all new Medicare patients is almost exactly the same as the percentage of physicians who say they accept all new privately insured patients. Medpac’s annual reports on payment adequacy measures show little of the massive “walking away” that you claim. 95 percent sign participation agreements, the same as in past years. 92 percent are accepting new Medicare patients, no change from prior years. The number of physicians… Read more »

Nate
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Nate

GTWMA,
I don’t beleive Medicare covers marginal cost. I don’t beleive Medicaid pays anything close to marginal cost. If they did why do so many doctors opt out? If your argument was even close to accurate then an economist would expect every provider to particiapte in those plans. Why would any provider choose to not participate in a plan representing 50% of the market based on payment if it covered his marginal cost?
I don’t think highly of physician business skills but find it hard to beleive that many are making the bad business decision to walk away from profitable business.

GTWMA
Guest
GTWMA

Now, back to the issue of marginal costs. Seems as if you accept the idea that evidence shows that Medicare covers marginal costs. So, that gets us to the next stage of the argument–cost shifting is mostly a question of who pays the fixed costs of business. The two most important points about this are: (1) this is not a situation unique to health care. Whenever you have suppliers and demanders with market power–and both Medicare AND hospitals and physicians have significant market power–you are going to have this tussle over who pays their fair share of fixed costs. And,… Read more »

GTWMA
Guest
GTWMA

You are assuming, Nate, the provider income is a set figure that must be paid. It’s not. It’s determined by the most efficient payment to get the provider to provider services.
And there is ample evidence that there are many, many physicians and hospitals who have figured out care so well, that they provide higher quality care at lower cost than the Medicare payment.
The question isn’t whether Medicare’s payment is too low. It’s why these other providers insist on receiving their income, rather than insist on providing the rest of lower cost and higher quality service.

Nate
Guest
Nate

A=provider income
B=public payment
C=private payment
A must be greater then $x for providers to stay in business. If you reduce B then you must increase C, that is the simple math that people understand and the simple math that applies in the real world, outside the ivory towers and their theroies.
We have controlled experiment ask any hospital administrator or provider asking private insurance for an increase why and they will tell you.