Meme-busting: Hospitals shift costs

This is an ongoing series on health care system “memes” that continue to permeate our debate, even when evidence shows them to be false. The introductory post contains links to all entries.

Judging from a recent comment, among other things, it seems that it is still taken for granted that hospitals shift costs, or make up for shortfalls in public payments by charging private insurers more.

I’ve written so much on cost shifting that it is hard to think of another way to make the point that hospitals are limited in their ability to do this. For a list of many of my posts on this subject, some of which link to my paper on it, see the hospital cost shifting FAQ entry.

Here’s a new approach to the subject, based on the exceptional reporting of Christopher Flavelle of Bloomberg News. Let’s take a look at what some of the hospital and insurance industry groups have claimed. Flavelle’s briefing paper has some terrific quotes.

From the AHA:

A spokeswoman for the American Hospital Association, Marie Watteau, wrote in an email March 10 that “underpayment by Medicare and Medicaid is one of the many factors that go into the rates negotiated by hospitals.” Payment rates by the two programs “can be viewed as a cost of doing business that competing providers all must pass along,” Watteau wrote. “It is analogous to when gas prices go up, airlines all must raise their prices.”

From AHIP:

A spokesman for America’s Health Insurance Plans, Robert Zirkelbach, asked by Bloomberg Government on April 28 whether hospitals charged private payers more in response to cuts by Medicare and Medicaid, responded by e-mail, “Yes, definitely, and that is what the data show.”

Both associations reference a 2008 paper by Miliman in support of their cost shifting claims. However,

Rather than demonstrating cost-shifting, the 2008 Milliman paper referenced by both associations only measures the difference in what Medicare, Medicaid and private insurers pay hospitals for the same services, a phenomenon called price discrimination. One of the authors of the paper, John Pickering, said in a phone interview March 10 that despite the use of the term “cost-shifting” throughout the document, the study was “more a look at price differentials that exist,” and wasn’t intended to examine whether those differentials were caused by low Medicare and Medicaid payments.In fact, Pickering said he wasn’t aware of any evidence whatsoever demonstrating that hospitals react to Medicare cuts by raising costs for private insurers. “I haven’t seen analytics that argue the cause and effect,” he said.

The analytics I’ve seen (from careful studies published in the health economics journals) show that, with the possible exception of the late 1980s, if and when hospitals shifted costs, it was at a rate much lower than AHIP or the AHA suggest. In many circumstances hospitals cannot shift costs at all. They lack the untapped market power to do so. In others, they can shift costs, but at about 20 cents on the dollar; private hospital prices go up by 20 cents for each dollar public prices decline. The remaining 80 cents — the vast majority of shortfalls — are made up by cost cutting not cost shifting.

Since I’ve backed all this up before, I’ll refer you to prior posts for the details.

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