• “Dynamic cost-shifting theory is hereby put to rest”

    Chapin White concludes his Health Affairs paper on cost shifting, “My hope is that the dynamic cost-shifting theory is hereby put to rest.”

    His work certainly pounds another nail in the coffin.

    In the two-stage least squares analysis, the estimated elasticity was 0.773, meaning that a 10 percent reduction in the Medicare payment rate was associated with a 7.73 percent reduction in the private rate

    The estimate is based on the use of components to changes to Medicare payment rates that are arguably random with respect to private rates, over the 1995-2009 time period. One can’t do much better than that. This is a challenging issue to study.

    white-cost shift

    The paper includes a very nice summary of cost shifting theory. I wish the analysis could have been done at the hospital, rather than the hospital referral region level, but the private price data didn’t allow it. Suffice it to say, despite the high and varied prices hospitals charge, one can’t easily reject the notion that Medicare’s price controls exert downward pressure on them.

    All prior cost shifting posts are under the cost shifting tag. There’s also a cost shifting section in the FAQ, which has not been updated in a while.


    • Well, consider TIE’s cost shifting post that reviews Morrisey’s explanation of why cost shifting cannot occur. The explanation is based on an assumption that hospitals reduce Medicare capacity in response to price cuts (i.e., hospitals accept some Medicare patients, but refuse others whenever they need to reduce capacity). An assumption that hospitals can discriminate among Medicare patients in this manner is unrealistic and if we reject it, then Morrisey’s argument falls apart. So there’s no theory to support White’s study, which leaves me wondering what it might mean.

      • If a hospital enters into agreements to join the network of more insurers, expanding the number of privately insured patients it serves, it will end up filling more beds with private patients. Medicare patients who might otherwise use that hospital will either go elsewhere or, for elective procedures, shift their visit date into the future. The net effect is fewer Medicare patients and more private patients.

        This is not that hard.

        • Perhaps one hospital might be able to manipulate its Medicare capacity. But I don’t see how all hospitals in a geographic market could cut back significantly on Medicare patients in response to a price cut. It would cause an uproar. Also, insurers tend to include all hospitals in their networks because they want to provide “choice” for their subscribers. So it may not be so easy to increase private capacity.

        • ALong with studies showing correlative effects of altering rates of either private or Mcare and the response to the other, have beneficiary zip code patterns been examined (or could they) to watch for shifting care patterns ?

          Not to simplify, but does not seem hard to do


    • Nice study. It would be nice if Chapin White could do a follow up study looking at Medicare rates and how they respond to changes in private insurance rates. If Uwe is correct, increases in private rates should lead to increases in Medicare rates.