• 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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    • Again you’re approaching this from a strictly theoretical economic view and ignoring the real world experience of the people who deal with this every day. It brings to mind a joke I once read, “An economist is someone who sees something working in practice and asks whether it would work in principle.”

      A hospital/provider network preparing their budget for the next year projects out patients served, services provided, overhead costs, etc., translates that into revenue needed, and nets out the revenue they’ll get from the Medicare/caid population. What’s left over is the revenue needed from privately insured patients. To the extent that the Medicare revenue does not cover costs (and it doesn’t), the money needs to come from elsewhere. Some hospitals are able improve their efficiency and optimize the delivery of care to make up some of the difference, but they are the minority. For the rest it results in them taking a harder stance in insurer negotiations, and demanding higher reimbursement. An insurer has limited power because they cannot simply back out of the deal and tell all of their customers that the biggest/most popular hospital in town is no longer in-network.

      This is happening right now, but it’s not happening in “peer-reviewed academic journals”. It is happening when some consulting actuary is doing membership and pmpm cost projections for private and public populations for a hospital or network, and they are going into contract negotiations armed with those numbers and a reimbursement floor they will not go beyond because it means going out of business, a floor that is pushed higher by the inadequacy of Medicare reimbursement.

      • @AB – It is not true that there are no academic studies of this in peer-reviewed journals. There are. I’ve referenced them, as do the industry reports. Have you read them? They acknowledge some cost shifting, as do I. The most recent evidence is that it is in the 10-20% range. The industry seems to insist on doubling those values (or more). But all they cite are price differentials. Assuming price differentials are cost shifting is a fallacy. Moreover there is no reason to do it. Why not use a 20% value? It is far more defensible.

        If you think you’re going to convince me to ignore the academic literature, you’re wasting your time. How could I? And why should I? (And yes, I read the industry reports too.)

    • I’m not saying there are no academic studies of this. What I’m saying is trying to apply a theoretical economic model to this is not the right approach.

      There is cost shifting that happens. The scenario I’ve described is just an example, but I know actuaries that work on this every day, and they see it happen directly. They prepare these projections, identify the shortfall from public programs, and tack it onto what reimbursement is needed from private insurers. Do they get all of it? Of course not, I don’t think anyone disagrees that the 100% assumption in the PWC study was unrealistic. But it is no less unrealistic to call cost-shifting a “myth”, as you have previously done.

      Even if it were only 10-20%, that is a significant amount of money, one that makes cost-shifting a serious issue to address. And what gets lost in all of this is the reason why cost-shifting is important, namely, what effect would forcing more providers to accept Medicare reimbursement with a strong public option have on both private insurance rates, as well as the future supply of medical professionals.

      • @AB – The myth is that it is 100% or even 50%. Yet that’s what the industry reports, and this latest Dobson study assume. Are we debating a title I used many posts ago? Is that all? What has it got to do with this post? I’ll agree to the plausibility of 10-20%. I acknowledged this from my very first post on this topic (1.7% upward private shift from a downward 10% public one is roughly what I wrote). I’ve been consistent, both with myself and with the literature. Why are you still debating this? We seem to agree. It is Dobson et al. with whom I have an issue, not you. Come on, let’s stop doing this. Or, tell me what you’re disagreeing with. I’m not seeing a problem here.

    • I think we agree on some things and disagree on others. We disagree on the whether there is a direct causal link to Medicare underpayment and private insurance overpayment. We also disagree on the amount of cost-shifting. I think the number is much higher than 10-20%, but I do not have enough empirical basis to guess at a number. The Lewin Group estimated it 40%. I still believe that taking a theoretical approach to this rather than talking to the people who actually deal with it on a daily basis (not just actuaries, but hospital administrators, etc) is the wrong approach to try and understand it. But even granting the 10-20%, that is still a very large dollar amount we’re talking about, enough to legitimize the widely held concerns about public to private cost-shifting.

      I think part of the reason I still take issue with this is because of how it is used. Ezra Klein takes what you’ve written and says the idea that any cost-shifting takes place has been “dismantled”. Matthew Yglesias takes what you’ve written and says “Cost-shifting onto private insurers is largely a myth”. I know that you’re not responsible for what others do in response to what you’ve written, but it is somewhat a function of titling the post “The Health Care Cost-Shifting Myth”. In the quick-hit nature of blogging, others are all too keen to jump on quick bites and leave out key details or background information. Much of this was written before the PWC study and its bogus 100% cost-shift assumption, so it’s not all about combating that study. I just think that the overall tone of the discussion is to marginalize the impact of cost-shifting, and that is a very bad direction to go. Cost-shifting (or cross-subsidization, whatever term you want to use for it) is a very serious concern that needs to be kept in mind as we discuss moving more and more people into government-funded programs with reimbursement rates that are lower than the cost of providing that care.

      One last note, I tend to have a confrontational tone when writing that is often interpreted to be more intense than what I intend. I try to acknowledge and temper that, but often fail miserably. I’m not a jerk, but I can often sound like one when I disagree. If that was the case here I apologize.

      • @AB – We agree that there is a causal link. That’s what a cost shift is. I think the link is small, 20% is an absolute cap (really, I’m rounding up from the 17% from the literature I trust). That doesn’t mean it is 20% nationally. Frankly, I believe 10% is plausible from the research. We’re not going to convince each other whose number is right. But we agree there is a causal link, just the level we disagree. So when we’re rich we’ll fund another study and get it right, can we agree on that?

        You are right, I am not responsible for how it is used. You are right, there is sensationalism in blogging. So is there by the industry. Fight fire with fire. That’s the nature of the beast. No sense in hoping otherwise. Won’t happen.

        The issues are just as serious in getting this idea wrong in the industry’s favor. They’re not making this argument for the betterment of humanity. That’s just not a believable position and their tactics reveal that.

        On a pure political economy level one could reduce public funding by $1 and compensate the private policyholders for the cost shift. If the shift is less than $1 (and we both agree it is) then the government still saves money. If the shift is way down where I think it is, this is a huge government savings.

        I’m not concerned about the tone of the argument. I would like to stop repeating ourselves. I understand your perspective and disagree with it, and vice versa I presume. I don’t think we’re going to make much more progress on it. Still, if you haven’t read the studies (academic and industry) I encourage you to do so. Even the Dobson paper has some decent content. They acknowledge this debate and correctly note the distinction between price differentials and cost shifting. But then, almost beyond belief, they equate the two and presto, cost shifting by assumption. That’s what I was focusing on here. (I tracked back through their references, some of which reference some literature (though not entirely accurately) and other industry reports. Their 50% figure is not well grounded.)

    • Perhaps the author should consider ‘reference incomes’ within a principal – agent framework. If physicians have to treat medicaid and medicare patients at a loss, then they will simply make up the revenue somewhere else in order to maintain the income they want – either through price increases, or supplier-induced demand. Also, maybe they should consider physician market power – i.e that they are price-setters to private insurers, and price-takers from publicly insured. There’s a wealth of theory on cost shifting – look up a paper by Sloan.