The Incidental Economist

Truth be told, I sat down early this morning to write another post about racism, but I needed to clear this out of the way.

I’ve been remiss in not posting some cost shifting claims, counter-claims, and related. Here’s the long awaited update. For anyone new to my writing on cost shifting, see these ~80 prior posts (perhaps start here).

From a March 5, 2020 Colorado Sun story on the state’s public health insurance option bill:

The bill also gives the insurance commissioner new authority in other areas of the health insurance market. The commissioner would be able to deny any proposed insurance rate “that reflects a cost shift” between the public option and other plans. In other words, if a hospital tries to make up for its lower revenues under the public option by charging insurers more for people covered by other plans, the commissioner will block it.

From a January 2020 report by the Colorado Department of Health Care Policy & Financing titled Colorado Hospital
Cost Shift Analysis:

Cost shifts are driven by strategic hospital decisions, not by shortfalls from public insurance. The increased funding generated by public, taxpayer funded programs — which are intended to reduce private insurance premiums and out-of-pocket costs — are not being passed along to health care consumers and employers. Health First Colorado (Colorado’s Medicaid program) has steadily increased payments year-over-year since 2009. Hospitals could have been passing on significant savings — from the reduction in charity care and the increases in Medicaid payments — to commercial insurance consumers and employers if they had matched national cost benchmarks. Instead, Colorado has far exceeded those cost benchmarks to the disadvantage of consumers and employers.

From an analysis published on March 2, 2020 by the American Action Forum:

To make up for the shortfall in payments from Medicare and Medicaid, hospitals must negotiate higher payments from private insurers. For example, the Congressional Budget Office found that private insurers reimburse at rates 89 percent greater than Medicare, on average.[3] Similarly, the RAND Corporation found even greater disparity between Medicare and the private market, with private plans reimbursing at 241 percent of Medicare rates in 2017.[4]

A tweet by Avik Roy on May 10, 2019:

Way back when, I used to subscribe to the cost-shifting thesis. But the overwhelming evidence is that hospitals make up their cost figures, and charge higher prices to the privately insured because they can. @Afrakt has been right on this all along.

— Avik Roy (@Avik) May 10, 2019

That is all.

@afrakt

Share this...

Twitter

Facebook

email

Tweetable

Here’s a round up of some thing that crossed my eyeballs about cost shifting, about which I’ve written a lot.

1. Who Pays in Pay for Performance? Evidence from Hospital Pricing, an NBER working paper by Michael Darden, Ian McCarthy, Eric Barrette: This is a revision of a prior working paper about which I wrote here. The paper finds that Medicare pay-for-performance programs “led to increases in private payments of 1.4%, or approximately $183,700 per hospital based on an average relative penalty of $271,000.”

In the revision, just as in the original version, though the authors do not definitively rule out cost shifting, they do not necessarily interpret their findings as evidence of it. As I wrote in my reaction to the original version, we should not either. I provided several reasons, among which were this:

Hospitals were aware in advance of their risk of being penalized. Those that looked like they would be may have invested more in quality improvements. For some, those improvements didn’t translate into avoiding the penalty, but they did increase the value those hospitals were delivering. Private payers may have been willing to pay more for that additional quality. It’s possible they’re even willing to pay more for investments in quality that haven’t yet translated into actual improvements.

2. Why Air Ambulance Bills Are Still Sky-High, by Rachel Bluth in NPR’s Shots:

[Rick] Sherlock [president and CEO of the Association of Air Medical Services] explained that reimbursements from Medicare and Medicaid do not cover the cost of providing services. So charges to private patients, he told the legislators, must make up that difference.

3. A tweet from economist Joel Waldfogel:

In case you need a fresh illustration of third degree price discrimination (or "segmentation" in b-school lingo), check out the cross-country variation in Spotify's monthly subscription price. pic.twitter.com/vfItpiqPxC

— Joel Waldfogel (@JWaldfogel) February 15, 2019

Is Spotify charging higher prices in Denmark because consumers in Vietnam will only pay $2.50 per month? Do you think the Danes think this too? That would be cost shifting and it’s what the air ambulance industry wants us to believe about their private prices with respect to Medicare/Medicaid ones. It’s what the hospital industry wants us to believe too. But if it’s cost shifting in those sectors, why not in the case of Spotify? (Hint: None of this is cost shifting. All of it is price discrimination.)

@afrakt

Share this...

Twitter

Facebook

email

Tweetable

From a January 24 article by John Ingold in The Colorado Sun:

“We believe that the cost shift occurs because Medicare and Medicaid pay 69 cents on the dollar for our costs,” said Julie Lonborg, [a] spokeswoman [for the Colorado Hospital Association].

And,

the cost shift has grown over the past nine years, according to the state report. In 2009, Medicare and Medicaid in Colorado paid 78 cents and 54 cents, respectively, for every $1 worth of care their patients received. Privately insured patients paid $1.55 for every $1 worth of care

By the way if the reason for higher private payments is lower public payments, then what would you predict for hospital margins? Maybe you’d think they’d be close to zero. For what reason would the be higher if you believe that only cost shifting explains the public-private price gap? Or, at least maybe you’d think they’d hold steady. But, Colorado

hospital margins — the money left over after payments are taken in and expenses are paid — increased from $417 million to $1.2 billion [between 2009 and 2017].

The consistent way to explain all of this is pretty simple. (Whispers, “Market power.” Mumbles, “Price discrimination.”) There are several other weird explanations for increasing hospital margins in the article. None of them make sense to me.

The Aspen Times ran a related AP article on February 3.

“One conclusion could be that the benefits of Medicaid expansions and the ACA (have) not been passed onto commercial insurance, employers or commercial consumers,” the report states.

This is a rather devastating argument against cost shifting. If the reason private payments go up is because of public payment shortfalls, then when public programs pay more, shouldn’t private payments go down (at least relative to the counterfactual trend)? In all my years of focus on cost shifting,* I cannot recall a single example of a premium reduction dividend due to (as in, caused by) higher public payments. (If you know of one, let me know.)

I have not read the state report (titled “Cost Shift Analysis Report“). The Colorado Hospital Association has also recently released a report (titled “Health Care Costs and Hospitals: Drivers and Opportunities“). I have not read it either, but a word search reveals that it includes this:

Another possible factor suggested by external research (such as the most recent CHASE Cost Report) is the volume of cost shifting, as areas with very low Medicaid reimbursement rates may need to charge proportionally more of their private insurers—a cost that the insurers likely pass directly onto the patients.

I would be happy to discuss cost shifting with anyone involved in the Colorado debate (or that of any state, for that matter).

* If you’re new to the blog, we have a cost shifting tag, under which you will find everything I’ve ever done on the topic.

@afrakt

Share this...

Twitter

Facebook

email

Tweetable

A new NBER working paper by Michael Darden, Ian McCarthy, and Eric Barrette claims to have found evidence of hospital cost shifting. I’m not so sure.

I will skip the throat clearing about what hospital cost shifting is, why or when we should or should not expect it to occur in theory, and what the prior literature says in some detail about whether it occurs in practice. Go read this Upshot post and all it links to for that. I will only say that based on the prior literature, we should begin consideration of the new paper with some skepticism about claims of cost shifting — it is reasonable to believe it doesn’t happen.

Therefore, even to find, with credible methods, a modest degree of cost shifting — like $0.10 per dollar of public payer shortfall is shifted to private payers — would be a big deal.

What Darden et al. found isn’t modest. It’s huge. They estimated that more than half of Medicare payment shortfalls are recouped by jacking up prices charged to private insurers — 56 cents on the dollar, to be precise. Yow! (Right here you should wonder why hospitals would stop at 56 cents on the dollar. If your answer is, “that’s the limit of their market power,” you’re on the right track. That also means they’ve exhausted their market power and, unless they acquire more, cost shifting should halt. And right there is why more than rare claims of cost shifting aren’t credible.)

But, without even looking at methods, we should be careful about taking this figure to mean that there really is cost shifting at a rate of 56 cents on the dollar. Given prior work, a Bayesian might, at most, update his/her thinking from “there is no cost shifting” to “there could be a little cost shifting.” However, the methods might not even warrant that.

So, what’s up with the methods? Craig Garthwaite did a nice job pointing out a few issues, starting with this tweet:

There have been a bunch of tweets about the new cost shifting paper this morning. I have a couple of thoughts we should keep in mind. First, finding evidence of cost-shifting is hard at least in part because finding the right setting for testing for its presence is hard (1/4)

— Craig Garthwaite (@C_Garthwaite) February 12, 2018

Let’s unpack a few of his concerns, which I share. First of all, the headline result of massive cost shifting is based on examining how private hospital prices change due to changes in hospitals’ Medicare penalty status. That is, Medicare financially penalizes hospitals for lower quality in several ways, which the paper examines. The study found that hospitals that change from not-penalized to penalized status increase their private prices more than hospitals that don’t. From that, they back out a cost shift rate of 56 cents on the dollar.

But there’s another way to estimate what the cost shift rate is, not by looking at changes in penalty status, but by looking at what the penalty amount is. How much does a hospital cost shift when it is penalized an additional dollar? When estimated this way, the authors find small and statistically insignificant evidence of cost shifting, which is a highly credible finding on its face. (See footnote 17 of the paper.)

So, one has to ask, why might hospitals that become penalized differ from those that don’t, and in ways that are associated with increases in private prices? About this, Craig made a very good point: Hospitals were aware in advance of their risk of being penalized. Those that looked like they would be may have invested more in quality improvements. For some, those improvements didn’t translate into avoiding the penalty, but they did increase the value those hospitals were delivering. Private payers may have been willing to pay more for that additional quality. It’s possible they’re even willing to pay more for investments in quality that haven’t yet translated into actual improvements.

Separately, it’s also possible that hospitals that respond to potential penalties change their marginal costs, which would change their profit- (or revenue-) maximizing price. This could look like cost shifting, but it’s still a response to a change in quality or, more generally, cost structure. It wouldn’t be a response to Medicare reimbursement shortfalls in the sense that if Medicare just cut payments without linking them to quality, one would not expect the same change in private prices.

The BIG IDEA here is that firms (here, hospitals) respond to incentives in ways that change their production function (their costs and the value they provide). In fact, this is the point of Medicare quality penalty programs. They should affect what hospitals do and that, itself, can affect prices, as explained above. That’s not cost shifting. Not being able to control for that in a cost shifting study is a big problem. The particular approach taken in this paper likely doesn’t address this problem, leading to estimates that should not be attributed to cost shifting.

I will close by adding that this paper is highly useful for tracking down claims of cost shifting made by hospital executives and policymakers. See the main text as well as footnote 1.

PS: I should make explicit what should be obvious. I would appear to have a large interest in arguing away findings of hospital cost shifting, given my prior writing on the issue. I am so aware of that apparent conflict that I had a few colleagues without that conflict look over this post before publishing. All of their input was incorporated to their satisfaction.

@afrakt

Share this...

Twitter

Facebook

email

Tweetable

Via blog post, David Anderson drew my attention to a Health Affairs post by Billy Wynne, the Managing Partner of TRP Health Policy, in which Mr. Wynne wrote, “[C]ommercial rates are hiked, often stratospherically, to compensate for typically insufficient Medicaid reimbursement.”

Normally, I’d have to remind the world that many recent studies find no evidence for this kind of cost shifting. But, David did the work for me (and by citing me), so go read his post if you still don’t know the truth of the matter.

Oh, and spread the word. It’s very hard to keep up with assertions of cost shifting and push back against every one, even with David’s help.

@afrakt

Share this...

Twitter

Facebook

email

Tweetable

The Affordable Care Act (ACA) has allowed states to expand Medicaid. Medicaid pays hospitals prices that are lower than those paid by private insurers. Does this cause hospitals to charge private insurers even more to make up the difference, a cost shift?

Nope. Read the details in my JAMA Forum post.

@afrakt

Share this...

Twitter

Facebook

email

Tweetable

When Medicare cuts payments to hospitals, what happens? It may not be all bad. My new AcademyHealth post explains.

@afrakt

Share this...

Twitter

Facebook

email

Tweetable

Multiple people have contact me about the cost shifting estimate in the recent NBER paper by Craig Garthwaite, Tal Gross, and Matthew Notowidigdo. Page 5 of the paper reads, “A back-of-the-envelope calculation suggests that hospitals absorb approximately two-thirds of the costs from uncompensated care.”

People may have read this as the smoking gun. “Ah-ha! That’s why my premiums are so high, and why they’ll come down a lot as coverage expands.”

Not so fast. First of all, the increase in premiums implied from the estimate is entirely consistent with prior estimates about which I’ve already written. That implies, second of all, that they’re very small.

Here’s how to figure that out:

• In 2012, hospital uncompensated care costs were $46 billion, according to the paper.
• One-third of that (the amount estimated to be passed on to the privately insured) is about $15 billion.
• In 2012, total spending on private premiums was $917 billion, according to National Health Expenditure estimates.
• Hence, 1.6% of premium spending was due to hospital uncompensated care ($15 billion ÷ $917 billion).
• To put that in dollar terms, for a typical person with single coverage from an employer in 2012 (at a total cost of $5,615), about $90 is due to uncompensated hospital care.

Now, as coverage expands, this does suggest a reduction in premiums, but only if other support for uncompensated care isn’t withdrawn. Guess what? It is. Don’t expect coverage expansion to pay a dividend to premium payers if it’s, in a sense, already paying it to the government through lower support for uncompensated care.

Furthermore, coverage is not expanding to universal. So, at best, only part of that $90 could be recouped in lower premiums. Moreover, coverage expansion is occurring slowly, over years. So, maybe, at best, you could save $20 one year, $30 another, and so forth. Good luck even noticing that as premiums change (and generally rise) for many other reasons.

@afrakt 

Share this...

Twitter

Facebook

email

Tweetable

Ezekiel Emanuel made the very popular cost shifting argument in today’s New York Times:

Medicare negotiations would do nothing to contain drug prices for the 170 million Americans who have private health insurance, through their employer, the exchanges, or by self-purchase. Having the federal government negotiate lower prices for Medicare would most likely drive up prices on the private side as drug companies tried to recoup their “lost” profits.

Almost ten years ago I wrestled with exactly this cost shifting idea for the first time while writing a paper about a VA prescription drug plan for Medicare-enrolled veterans.

The VA purchases drugs at prices about 40% below those paid by Medicare drug plans, which are all private plans. Medicare does not use its price-setting power for drugs the way it does for hospital and physician services. Whether it should is a hot topic today, as it was during the run up to the 2003 law that created the Medicare drug benefit, Part D. The market consequences of a VA-Medicare drug plan would be similar to Medicare drug price setting: it would push the price paid for many drugs well below manufacturers’ claimed costs.

This is why drug manufacturers argue against Medicare drug price setting. Their argument frequently includes the claim that if Medicare (or the VA) pays a lot less for drugs, manufacturers will just shift costs to commercial market payers. Premiums will go up for everyone else. (It’s unclear to me why this should bother drug manufacturers, since, by this logic, they get paid either way, if not from Medicare, the VA, or Medicaid, then from commercial market plans. You’d think they’d want to keep quiet about that.)

I worked this cost shifting argument into my manuscript on a VA-Medicare drug plan. When he saw it, one of my co-authors paid me a visit. “Do you buy this cost shifting argument?” he asked.

“Sure,” I said. “If drug manufacturers are paid less by the VA or Medicare, don’t they need to make up for that lost revenue?”

“Well, do you think drug manufacturers are profit maximizing organizations?” His question was a trap.

“Of course! That’s why they cost shift.” I had just fallen right into it.

“Austin,” he said, “if they could profitably raise prices to commercial market payers after government ones pay less, why didn’t they raise those prices before? It suggests they left money on the table.”

There’s no response to this. It’s devastating. More in my cost shifting talk, papers [1 and 2], and blog posts.

@afrakt

Share this...

Twitter

Facebook

email

Tweetable

Brad Flansbaum drew my attention to this testimony before the House Ways and Means Committee by Mark Miller, Executive Director of the Medicare Payment Advisory Commission (emphasis added):

However, hospitals’ overall Medicare margin—a measure of the relationship between Medicare payments for, and hospitals’ costs of, providing care to Medicare patients—is negative. In 2013, the median hospital margin was –5.4 percent. Relatively efficient hospitals (i.e., hospitals with lower costs and better quality over three years) had a median margin of 2 percent in 2013.

Part of the reason Medicare margins are low is that hospitals have high costs per case driven in part by lack of fiscal pressure from private payers. The Healthcare Cost Insitute reports that payment rates from private insurers have grown at an average of over 5 percent annually from 2011 through 2013. Commercial rates, on average, are about 50 percent higher than hospital costs and over 50 percent higher than Medicare rates. For example, Aetna and Blue Shield of California pay hospitals rates that are often 200 percent of Medicare’s rate for inpatient care and 300 percent of Medicare’s rate for outpatient services in California (California Department of Insurance 2014a, California Department of Insurance 2014b). In 2013, hospital all-payer margins were a record-high 7.2 percent.

The Commission has shown that higher payments from private insurers allow hospitals to have higher costs which, in turn, makes Medicare margins more likely to appear inadequate. There is evidence that higher private insurer payments result from hospital consolidation—that is, hospitals have gained greater market power relative to private insurers. When financial resources are abundant hospitals spend more—increasing their number of inputs and cost per input. All else equal, higher costs per case result in lower Medicare margins.

Of course, hospitals vary in their circumstances. Some hospitals have market power, a higher percentage of private payer patients, and stronger revenue from investments and donations. These hospitals tend to have higher costs. Hospitals without these characteristics have lower costs. Put differently: hospitals with the most revenue have the highest costs per admission. For example, we found that hospitals with low private payer profits from 2008 to 2012 had a median standardized Medicare cost per case in 2013 that was about 9 percent less than the national median, and generated a median overall Medicare profit margin of 4 percent. In contrast, hospitals with high private payer profits over the same period had higher costs per case (3 percent above the national median) and lower Medicare margins (–9 percent). This analysis suggests that hospitals can constrain their costs, but the lack of pressure from private payers is discouraging them from doing so.

This is main, modern “it’s not cost shifting” argument, and it has been offered by MedPAC before.

@afrakt

Share this...

Twitter

Facebook

email

Tweetable