21% Cost Shift: Neither Ceiling Nor Floor

In her careful study of the effects of Medicare cuts in the late 1990s on private prices for hospital services Vivian Wu obtained an estimate of a 21% cost shift. That is, when Medicare prices went down by $1, private prices went up in response by $0.21. She also found the degree of cost shift varied by level of hospital competition. For the most competitive markets, cost shifting could be as low as 5%.

What are we to make of this 21% figure? Is it the maximum degree of cost shifting we might expect due to Medicare cuts? Or is it the minimum? Where in the range of likely levels of cost shifting does this point estimate sit? Without further information reasonable people can disagree. In her reaction to Wu’s study Megan McArdle took a stab at this question, speculating that the 21% was not a ceiling. She declared it a floor.

McArdle is “wont to prefer academic studies,” as am I. So let’s look at some. I am aware of several that estimate levels of cost shifting below Wu’s 21% figure. For instance, Cutler found no evidence of cost shifting in the 1990s (0%) and Zwanziger and Bamezai estimated a cost shift rate of 17%. To be sure, one can find studies that obtain estimates higher than Wu’s 21% figure, though many are based on even older data and some use indefensible methodology.

So, I agree with McArdle that we cannot conclude with full confidence that 21% is a ceiling. However, I disagree that we can confidently conclude it is a floor. After reviewing the literature I think a reasonable person can only conclude that it is a credible point estimate far closer to the truth than those suggested by the industry.

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