Responses to cost shifting advocates

Here are six responses I received to my recent hospital cost shifting piece, each followed by my comments.

1. “Your piece is bullshit.”—Though compelling, this is not evidence based, whereas my piece was.

2. “Cost shifting is a thing because hospital margins vary by payer.”—For instance, see this (PDF). That margins vary by payer is fully acknowledged by everyone writing about cost shifting, including me in my piece. Payer-specific margins are evidence of price discrimination or cross-subsidization. They’re not, by themselves, evidence of cost shifting.

My Milbank Quarterly article explains the difference:

That hospitals charge different payers (health plans and government programs) different amounts for the same service even at the same time is a phenomenon well known to economists as price discrimination (Reinhardt 2006). That hospitals charge one payer more because it received less (relative to costs or trend) from another also is widely believed. This is a dynamic, causal process that I call cost shifting, following Morrisey (1993, 1994, 1996) and Ginsburg (2003), among others. Price discrimination and cost shifting are related but different notions. The first depends on differences in market power, the ability to profitably charge one payer more than another but with no causal connection between the two prices charged. The second has a direct connection between prices charged. In cost shifting, if one payer (Medicare, say) pays less relative to costs, another (a private insurer, say) will necessarily pay more. Whereas cost shifting implies price discrimination, price discrimination does not imply that cost shifting has occurred or, if it has, at what rate (i.e., how much one payer’s price changed relative to that of another).

Price discrimination is rampant: airline seats, hotel rooms, theater tickets and many other goods and services sell for different prices to different purchasers. Are they all cost shifting? Is the price I pay higher because you got a better deal in all these circumstances? That’s implausible, but if you want to believe it, you need to demonstrate that causal connection with more than pointing to payer-varying margins. Doing otherwise is confusing correlation with causation.

3. “Cost shifting has happened before. It’s not impossible.”—This is acknowledged in my piece. The most recent work doesn’t support cost shifting, however. Things were different at other times and can always change in the future. Also, an average effect may mask market-specific variations.

4. “You ignored cost shifting from the uninsured.”—My piece did not address this, that is true. It’s a different topic. The problem is, the literature on cost shifting from the uninsured is much thinner and of lower methodological quality than that for Medicare/Medicaid cost shifting. I summarized it in my Milbank Quarterly paper. See also this post.

As such, I don’t think there’s enough strong, empirical work on this to make confident, evidence-based statements. However, one could very reasonably argue that cost shifting from the uninsured is subject to the same economics as is cost shifting from Medicare/Medicaid. Hence, on that basis, I would conclude it’s likely very small to nonexistent.

5. “Hospitals could just refuse to accept Medicare and Medicaid patients. I heard a rumor that could happen.”—I’m skeptical hospitals could or would do this, but I could be wrong. Maybe a small number will try it. Nevertheless, this doesn’t really affect my cost shifting argument. Plus, I could hardly be held accountable to rumors. What I think is more likely is the following point, the best among those I received.

6. “It could be that lower public rates, combined with rigid social or legal norms about adequate care (limiting cost cutting), will drive hospitals out of business. This could lead to greater consolidation in the industry, increasing hospital market power. In turn, that could lead to higher private prices.”—This is a great theory, and one I’ve pondered. (You can see elements of it written into my Milbank Quarterly and HSR cost shifting papers.)

By the way, I think that most hospitals trying to deny care to Medicare and Medicaid patients (per idea #5, above) would go out of business, which turns idea #5 into idea #6.

In any case, this theory of increasing consolidation, in part driven by lower public rates, has some weak support. As I wrote in my HSR paper on cost shifting, some have estimated that 15% of hospitals could lose profitability due to planned reductions in Medicare payment rates. Some would undoubtedly close for this reason, which would increase consolidation in the industry. And that, would likely push private prices upward. This is all projected and speculative.

One thing I like about this theory, though, is it highlights the important, mediating factor: market power. Anyone wishing to understand cost shifting needs to pay close attention this. Too much discussion of “cost shifting” ignores it, inviting magical thinking—like hospital costs are fixed and simply must be shifted, without regard to the market power necessary to do so. Market power is the more useful concept. (See the work of Stensland et al and Michael Morrisey.)

Anyway, there is zero direct, hard evidence for the causal chain expressed in this response. The individual who offered it to me admitted as much. On the other hand, there is evidence consistent with the theory that when public rates go down, so do private ones, as my piece described.

Even if the causal chain offered is possible, there are reasons to think it’s not the likely (or only) set of dominoes to fall. Perhaps our social or legal norms about adequate care are not yet binding because there’s so much waste in the system (there’s evidence of that!). It’s likely that many hospitals can become more efficient when prices are cut before they go bust. (See, again, Stensland et al and also Romely et al.)

Ultimately, I have to go with the evidence here. Cost shifting seems not to be happening, according to the most recent, high quality work. Prior to that, yes, it did occur, but at a relatively low rate. Once upon a time, 30 years ago, cost shifting was huge. That’s never happened since, and it’s high time we stopped thinking that massive cost shifting is inevitable. Responses to my piece illustrate that the cost shifting idea is strangely hard to shake, despite the evidence.


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