Cost Shifting by Assumption

Recently renewed claims by the insurance industry (or consulting firms on their behalf) that lower public payments to health providers result in higher health insurance premiums have reinvigorated the debate over cost shifting. This is no mere academic argument. Whether or not cost controls implemented in public health programs actually reduce overall health expenditures is central to how we finance health care and the range of options available to control its costs.

So it is important that we get straight in our minds the extent to which cost shifting exists, if at all. In an earlier post I reviewed academic literature on cost shifting and concluded that it either doesn’t exist or if it does it is small. Studies have found evidence of a 0.4 to 1.7 percent increase in private payments in response to a 10 percent decrease in Medicare and Medicaid fees. Older studies found higher rates but under a 1980s health care system that differs considerably from what exists today.

Thus, the most recent academic literature suggests at most a degree of cost shifting well below the level others have claimed. But, to be thorough, a few weeks ago I issued a challenge to readers: send me any credible peer-reviewed article that provides evidence of a substantial level of cost shifting.

It turns out the journal Health Affairs recently published an article pertaining to cost shifting. “How A New ‘Public Plan’ Could Affect Hospitals’ Finances And Private Insurance Premiums” by Allen Dobson, Joan DaVanzo, Audrey El-Gamil, and Gregory Berger (all employees of Dobson DaVanzo & Associates, LLC, a health care consulting firm) appeared on September 15, 2009. Some of the same authors published an article in Health Affairs in 2006 with much of the same intellectual content (at the time they were employed by the Lewin Group).

In a press release the authors summarize their findings that “a government-run plan that is aggressively implemented to include large proportions of the privately insured could test the U.S. health care financing system…Rising hospital private-payer payment-to-cost ratios could be followed by rising private insurance premiums.” In the paper itself, the key driver of this finding is the assumption that cost shifting will occur. The authors write, “Our model assumed that hospitals shift costs to private payers at a 50 percent rate.” As support, they cite Lewin and Milliman reports, the latter by the same individuals who produced the one I previously reviewed.

That is, the authors’ conclusion is preordained by their assumption. Costs will be shifted at a 50% rate because it is assumed they will be. No serious economist I know of believes this assumption. And nobody should if it is not based on a body of credible, peer-reviewed work, which it is not.

Why does the cost shifting fallacy persist? First, it stems from an accidental or intentional confusion with the notion with price differentials. That payer A pays less than payer B (a price differential) does not imply that payer A’s lower payment caused payer B’s higher one (cost shifting). Second, it is (or has been) an argument of convenience for the insurance and hospital industries. A legislator believing the argument would be less inclined to exert downward pressure on the public health budget for fear of constituency backlash in reaction to higher private payments and premiums.

Today, it is hard to understand how the cost shift argument, even if true, could work in industry’s favor. As Uwe Reinhardt put it in his NY Times Economix piece on this topic, “if [hospitals and health insurers] cannot resist a cost shift from government insurance programs to the private sector caused by a cut in, say, fees, then presumably they cannot resist a reduction in the growth of government spending on health care for any reason.” Why then should we build a health care system around an industry that claims it cannot solve the very problem health reform is, in the long run, intended to address?

It is time to recognize the 50%-100% health care cost shifting assumption for what it is and send it the way of the fallacies of antiquity. Like the flat Earth or the Ptolemaic model of the universe, it belongs in the dustbin, at least until such time as its existence is demonstrated with by a body of work, conducted by sound methods, and passing peer-review. Today, as far as I know, no such credible body of work exists, and the new Health Affairs paper by Dobson et al. makes no contribution toward one.

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