My interest in health care cost shifting goes way back (the cost shift tag will take you to all my cost shifting posts). For the uninitiated, health care cost shifting is the notion that changes in public program payments to providers cause offsetting changes in payments from private sources. So, for example, if Medicare pays hospitals less, hospitals raise prices for private payers. A key aspect of cost shifting is that it is a dynamic phenomenon, that changes by one payer cause changes for another.
Cost shifting is a controversial topic. A majority of health economists are skeptical it occurs, though they believe in price discrimination (a static phenomenon in which prices vary by payer for the same service).
In recent months I’ve undertaken a thorough examination of the peer-reviewed cost shifting literature. I believe I’ve read every paper that offers novel theoretical insight or estimates the size of the phenomenon. There are, probably, thousands that mention or assume cost shifting. I didn’t read all those. I just read the ones that were specifically about cost shifting.
Michael Morrisey conducted a review of the cost shifting literature in the early- to mid-1990s, resulting in two EBRI issue briefs (1993 and 1996) and an AEI-published book on the subject (1994). I’ve read those too. They’re very, very good. But nobody has published a literature review since then. Picking up where Morrisey left off, below is an annotated list of all cost shifting papers since 1996 satisfying the above criteria (and not reviewed by Morrisey).
My general conclusion after reading this body of literature is that careful theoretical and empirical examinations do not support the view that cost shifting is both a large and pervasive phenomenon. Read that carefully: cost shifting is not both large (i.e. it’s not anywhere near dollar-for-dollar) and pervasive (i.e. it doesn’t occur all the time, in every market). It has been found, by one study in one time period, to be large. Otherwise, not so much. Also, Santerre has shown that the welfare loss due to hospital cost shifting is incredibly small, at most 0.84% of private hospital expenditures in 1992.
The literature suggests to me that changes in private payments to hospitals are strongly influenced by the evolution of hospital and provider market structure and changes in underlying costs. The consequence is that one cannot simply presume a future change in public payments will give rise to a commensurate opposite change in private payments. It’s far more complicated than that.
That’s my interpretation. You can make your own. Here’s the raw material:
Annotated List of Cost Shifting Literature Since 1996
Clement J. 1997/1998. Dynamic cost shifting in hospitals: Evidence from the 1980s and 1990s. Inquiry 34(4). Theoretical contribution: Cost shifting is possible if hospitals have under-exploited their market power. Empirical contribution: Negative correlations between public and private margins among California hospitals in 1982-1992. HMO market strength is negatively correlated with private prices.
Cutler D. 1998. Cost Shifting or Cost Cutting? The Incidence of Reductions in Medicare Payments. Tax Policy and the Economy 12:1-27. Theoretical contribution: Cost shifting and cost cutting are both expected responses due to public payment reductions. When insurer demand elasticity for hospital services is low, more cost shifting can occur. Empirical contribution: In 1985-1990 found at least a dollar-for-dollar cost shift, no evidence of an effect on hospital closure; In 1990-1995 found no evidence of cost shifting, a small effect indicating increased closures. In both periods, nursing input was reduced. Little evidence that payment changes affected hospital size or diffusion of technology. Rise in managed care explains differences between two time periods.
Dobson A, DaVanzo J, and Sen N. 2006. The Cost-Shift Payment ‘Hydraulic’: Foundation, History, and Implications. Health Affairs 25(1): 22-33. Empirical contribution: In 2000, found statistically significant evidence of price discrimination among hospitals (not cost shifting). HMO penetration and private payment-to-cost ratio negatively correlated.
Dranove D and White W. 1998. Medicaid-Dependent Hospitals and Their Patients: How Have They Fared? Health Services Research 33:2 (Part I). June. Empirical contribution: Find no evidence of cost shifting among California hospitals in 1983-1992. Service levels fell at Medicaid-dependent hospitals and such hospitals were more likely to go out of business. Service level per admission positively correlated with hospital market concentration.
Friesner D, Rosenman R. 2002. Cost Shifting Revisited: The Case of Service Intensity. Health Care Management Science 5(1):15-24. February. Theoretical contribution: Cost shifting and lower service intensity are substitute responses and should occur under similar circumstances. Empirical contribution: Among California hospitals in 1995-1998, non-profits cost shift and for-profits do not. Both types lower service intensity for public payers.
Glazer J and McGuire T. 2002. Multiple payers, commonality and free-riding in health care: Medicare and private payers. Journal of Health Economics 21: 1049–1069. Theoretical contribution: The presence of a private sector dilutes Medicare payment changes and can repair Medicare payment policy errors. Medicare can free-ride on private payers, receiving higher quality than that for which it pays.
Gowrisankaran G, Town B. 1997. Dynamic Equilibrium in the Hospital Industry. Journal of Economics & Management Strategy, Volume 6(1):45-74. Spring. Empirical contribution: Due to more concentrated hospital markets, private payers experienced a 10% reduction in quality and a 1% decline in price (simulation of 1984 Medicare cuts).
Rice T, Stearns S, DesHarnais S, Pathman D, Tai-Seale M, and Brasure M. 1996. Do Physicians Cost Shift? Health Affairs 15(3). Fall. Empirical contribution: No evidence of physician cost shifting in 1988-1991. Evidence of reduction in private charges.
Rice T, Stearns S, Pathman D, DesHarnais S, Brasure M, Tai-Seale M 1999. A Tale of Two Bounties: The Impact of Competing Fees on Physician Behavior. Journal of Health Politics Policy and Law 24(6):1307-1330. Theoretical contribution: Cuts in public payments lead to lower quantity of care supplied to the public, a higher quantity supplied to private payers, and a lower private payer price.
Rosenman R, Li T, and Friesner D. 2000. Grants and cost shifting in outpatient clinics. Applied Economics 32(7): 835-843. June. Theoretical contribution: Cost shifting may occur, depending on the provider’s ability to cut costs. More public payers relative to private ones increases the degree of cost shifting. Government grants decrease the likelihood of cost shifting. Empirical contribution: The results are consistent with price discrimination (not cost shifting) by physicians in 1995. Providers use government grants to offset price discrimination.
Showalter M. 1997. Physicians’ cost shifting behavior: Medicaid versus other patients. Contemporary Economic Policy 15(2). April.Theoretical contribution: Cuts in public payments lead to lower quantity of care supplied to the public, a higher quantity supplied to private payers, and a lower private payer price. Empirical contribution: No evidence of cost shifting by physicians in 1983-1985. Evidence that private and public payments are positively correlated. Also, lower public payment leads to lower public volume.
Stensland J, Gaumer Z, and Miller M. 2010. Private-Payer Profits Can Induce Negative Medicare Margins. Health Affairs 29(5). May. Theoretical contribution: A high degree of hospital market power leads to high private prices and donations. These strong financial resources are associated with a high cost structure which is responsible for low Medicare margins. Empirical contribution: Between 2002-2006, hospitals with lower non-Medicare margins had higher Medicare margins. In turn hospitals with higher Medicare margins had lower costs. Hospitals with higher market power had higher costs, lower Medicare margins, and higher private-pay margins. Illuminates factors relevant to price discrimination.
Troyer J. 2002. Cross-Subsidization in Nursing Homes: Explaining Rate Differentials among Payer Types. Southern Economic Journal 68(4):750-773. April. Empirical contribution: Results illuminate price discrimination (not cost shifting) in nursing homes in 1994-1996. Medicaid payments are below costs for about 25% to 33% of Florida nursing homes.
Wu V. 2009. Hospital cost shifting revisited: new evidence from the Balanced Budget Act of 1997. Int J Health Care Finance Econ. Published online 12 August 2009. Empirical contribution: Between 1996-2000, on average, about 20% of Medicare hospital payment reductions are shifted to private payers. Degree of cost shifting is lower for hospitals in more competitive markets or markets with a higher share of for profit hospitals.
Zwanziger J, Melnick G, and Bamezai A. 2000. Hospital Performance: Can Cost Shifting Continue in a Price Competitive Environment? Health Economics 9: 211–225. Theoretical contribution: Cost shifting is possible if hospitals have under-exploited their market power. Empirical contribution: Among California hospitals in 1983-1991, private prices increased in response to reductions in Medicare rates (elasticities from 0.58 to 0.17, depending on hospital market concentration); they had a small and generally insignificant response to changes in Medicaid reimbursement.
Zwanziger J and Bamezei A. 2006. Evidence of cost shifting in California hospitals. Health Affairs 15(1). Empirical contribution: Among California hospitals in 1993-2001 found a 1% decrease in Medicare (Medicaid) prices caused a 0.17% (0.04%) private price increase. Over the 1997-2001 period, 12.3% of the total increase in private prices was caused by public payment decreases.