07/08/2015
Austin FraktAccording to the Medicare Payment Advisory Commission, the Medicare margin was negative 5.4 percent in 2013. Hospitals must make up for shortfalls through a combination of approaches, and cost shifting to the private sector is among them.
—Rich Umbdenstock, President and Chief Executive, American Hospital Association, in a letter printed in The New York Times on June 24, 2015
All TIE’s cost shifting posts are here. I wrote about it in The New York Times here.
06/17/2015 Austin FraktI never know when I’m going to need to document that claims of hospital cost shifting are still pervasive. So that my future self can easily find some, here are a few quotes from a report by HCTrends, which I’ve posted here.
Here are all of TIE’s cost shifting posts.
05/21/2015 Austin FraktIn advance of legislative consideration of hospital DSH payments, Wisconsin’s Legislative Fiscal Bureau wrote:
Some economists have disputed the claim that low reimbursement rates paid to healthcare providers by public programs (including both Medicaid and Medicare), result in cost shifts to commercial insurance payers. They assert that the rates charged to commercial insurers by a hospital are affected primarily by market factors that are independent of the rates paid by public programs. That is, a hospital generally seeks to maximize net revenues, regardless of the mix of its commercially insured and publicly-funded patients. The extent to which hospitals increase or decrease prices charged to commercial insurers is dependent upon their market power in relation to those insurers and competing hospitals. By contrast, the idea that a hospital charges higher rates to commercial insurers in response to lower public program reimbursement rates implies that the hospital has the market power to dictate a higher price to commercial insurers that it would not otherwise exercise in the absence of low public program reimbursement rates. In support of this view, these economists cite evidence that suggests that hospitals either reduce costs in response to constrained revenues from public programs, or attempt to attract a larger pool of commercially insured patients by reducing the price charged to commercial insurers.
Some economists. Could be almost anyone.
05/19/2015 Austin FraktA couple of weeks ago, I gave a noontime talk on cost shifting at the University of Wisconsin School of Medicine and Public Health. You can watch the video here. (I recommend it at 1.5x normal speed.) You don’t have to watch too long to notice I use a lemonade stand to illustrate some cost shifting concepts.
I gave the same talk that morning in a Wisconsin state capitol briefing. Sadly, the video for the morning event failed. Too bad, because it was better than the noontime talk; I had more energy, and it included a response from Brian Potter of the Wisconsin Hospital Association.
Brian did not like my lemonade stand metaphor. He was quoted by Wisconsin Health News (no link available) as saying,
“Hospitals accept all payers or patients regardless of their ability to pay, which is different from a lemonade stand because you don’t have to sell lemonade to everybody,” Potter said. “Healthcare is a need whereas lemonade is an optional service. When you’re having a heart attack, your price sensitivity and your consumerism and things that happen in normal markets don’t necessarily happen in healthcare.”
I didn’t get an opportunity to respond to this. If I had, here’s what I would have said: First of all, a hospital is not obligated to participate in every payer’s network. Second, the entire point of my talk was that most empirical studies of hospitals don’t support cost shifting. (See also this post and that to which it links for that evidence.) As such, it hardly matters what metaphor I use. The conclusion is the same.
The point of the lemonade stand was to help a lay audience understand what cost shifting is and why most of the empirical studies don’t find it. Of course, all models are wrong, but some are useful. Judging from written feedback, most of the audience thought my hypothetical lemonade stand model was useful, even if Brian didn’t.
03/26/2015 Austin FraktHere 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.
03/25/2015 Austin FraktThe following originally appeared on The Upshot (copyright 2015, The New York Times Company).
To hear some hospital executives tell it, they have to make up payment shortfalls from Medicaid and Medicare by charging higher prices to privately insured patients. How else could a hospital stay afloat if it didn’t?
But this logic is flawed.
Study after study in recent years has cast doubt on the idea that hospitals increase prices to privately insured patients because the government lowers reimbursements from Medicare and Medicaid.
Indeed, one recent study found that from 1995 to 2009, a 10 percent reduction in Medicare payments was associated with a nearly 8 percentreduction in private prices. Another study found that a $1 reduction in Medicare inpatient revenue was associated with an even larger reduction — $1.55 — in total revenue.
This would be impossible if hospitals were compensating for lower Medicare revenue by charging private insurers more. (Under different market conditions in prior eras, but not today, a few studies found some evidence that hospitals made up shortfalls from one payer with higher prices charged to another. Some are reviewed in a paper by me in Milbank Quarterly, and older ones are summarized in work by Michael Morrisey.)
The theory that hospitals charge private insurers more because public programs pay less is known as cost shifting. What underlies this theory is that a hospital’s costs — those for staff, equipment, supplies, space and the like — are fixed. A procedure or visit simply takes a certain amount of time and requires a specific set of resources. Therefore, if Medicare, say, does not pay its full share of those costs, a hospital is forced to offset the loss with higher prices demanded of private insurers.
The cost shifting theory goes back decades. But economists have long been skeptical of it, pointing to two key weaknesses. One is that it assumes hospital costs are immutable. We should be just as suspicious of such claims in health care as we would be for any other industry.
Jeffrey Stensland, Zachary Gaumer and Mark Miller — who serve on the commission that advises Congress on Medicare payment policy — offered a different view in a 2010 article in Health Affairs. Hospital costs, they said, can change and do so in response to market forces. They found that hospitals that face little competition are less efficient and have higher costs. With few competing hospitals to turn to, private insurers have little choice but to cover those high costs. But Medicare’s prices are fixed and are therefore low relative to the high costs of these inefficient hospitals.
Conversely, hospitals in more competitive regions are more efficient and can earn a profit on Medicare prices. But, because of competition, they must charge lower prices to private insurers. Put it together and it is hospitals’ underlying costs, driven by competition — not cost shifting — that lead to differences in prices charged to insurers and Medicare shortfalls or profits. This theory was conveyed in a report to Congress in 2011.
Another weakness of the cost shifting theory is that it runs counter to basic economics. Hospitals that maximize profits, or even maximize revenue to fund charity care, would not raise private prices in response to lower public ones. In fact, such a hospital would already be charging the highest possible prices to all payers. And, instead of raising them to one insurer if another paid less, they’d do exactly the opposite. Prices charged to two types of customers would move together, not in opposition, for the same reason it does so in other industries.
If a theater finds that bulk ticket purchasers are unwilling to pay as high a price as expected — perhaps because demand by tourist groups and corporations is down — it wouldn’t raise ticket prices for individual purchasers. Because it had filled fewer seats than anticipated from bulk sales, it would reduce prices to others in order to increase sales volume. With seats to fill, when bulk purchasers pay less, so do individual ones. Likewise, retailers charge lower prices to clear inventory, not higher ones to make up for less revenue from early purchasers. Economists have shown that the same logic applies to hospitals: They shift volume from Medicare and Medicaid to privately insured patients by lowering private prices in response to lower public ones — a spillover effect.
Though hospitals don’t seem to cost shift, it remains true that they do cross subsidize. That is, more profitable customers and services enable the provision of less profitable ones. That’s often confused as cost shifting, but there’s a key difference. Cross subsidization isn’t a dynamic process. If one customer becomes less profitable, that doesn’t automatically cause the hospital to charge another more, as the cost shifting theory demands.
The evidence is clear: Today, hospital cost shifting is dead, and the spillover effect reigns. A consequence is that public policy that holds or pushes down Medicare and Medicaid prices (or their growth) could put downward pressure on the prices hospitals can charge to all its customers and, in turn, on the premiums we pay to insurers.
It’s natural, then, that hospital executives continue to promote the idea of cost shifting. The widespread belief they encourage — that it promotes higher premiums — could foster support for larger public payments. It may be a politically useful argument, but it is an economically flawed one.
09/29/2014 Austin FraktIn an economic letter from the Federal Reserve Bank of San Francisco, Jeffrey Clemens, Joshua Gottlieb, and Adam Shapiro make the case that Medicare cuts in rates paid to hospitals induce private insurer cuts. They focus on the 2% reduction in Medicare payments after April 1, 2013, as required by the Budget Control Act of 2011 (sequestration).
Here’s the key chart:
Consistent with Figure 1, we see that Medicare price inflation dropped sharply in April 2013—2.5 percentage points between March and April 2013. Over the subsequent year, private-sector price inflation declined during the months associated with substantial numbers of contract renegotiations. Specifically, private PPI inflation fell 0.6 percentage point in July 2013 and 1.6 percentage points in January 2014. These facts suggest that Medicare’s payment cuts systematically passed through into the private payment system.
One should not be impressed with some speculative chart reading. Are there any studies, with stronger methods, that support the idea that private prices paid to hospitals fall when Medicare’s do so?
A study of this relationship in the hospital setting by White (2013) estimates that a 10% reduction in Medicare’s hospital payments results in a 4 to 8% reduction in private payments. White and Wu (2013) further find that hospitals handle these cuts by reducing their operating costs; this and related findings are summarized in Frakt (2013).
In the context of physician payments, Clemens and Gottlieb (2013) estimate the effects of changes in Medicare’s regional payment adjustments. They find that a $1 reduction in Medicare’s payments results, on average, in a $1 reduction in private payments. Since the average private payment exceeds the average Medicare payment by 40% in their study, the results imply that a 1% reduction in Medicare payments reduces private payments by about 0.7%.
The letter goes on to discuss the timing of private sector price responses to Medicare payment cuts. Evidence suggests it’s spread out over many years. In this way, even a one-time cut to Medicare payments can suppress health care prices more broadly and for longer than one might expect. Click through for the details.
06/19/2014 Austin FraktHere are some notes from a couple of recent papers in areas I’ve blogged about in the past. They’re worth knowing about.
1) Reference Pricing: “Paying on the Margin for Medical Care: Evidence from Breast Cancer Treatments,” by Liran Einav, Amy Finkelstein, and Heidi Williams (NBER)
Medical expenditures in the US are high and increasing. […] A natural economic solution which has not received much attention is a “top-up” design in which health insurance contracts would cover the cost of a baseline treatment, and patients could choose to pay the incremental cost of more expensive treatments out of pocket.
This is also called “reference pricing.”
[T]o our knowledge, [top-up design] has not received much attention in discussions of insurance coverage for different treatments, with the exception of a recent paper by Baicker, Shephard and Skinner (2012) who use a calibrated simulation model to explore this idea.
See also Robinson and MacPherson (2012), Robinson and Brown (2013), and Pearson and Bach, Health Affairs, 2010.
[E]vidence from randomized clinical trials has suggested no average difference in survival between mastectomy relative to lumpectomy with radiation (Fisher et al., 1985), mastectomy tends to be less expensive (Polsky et al., 2003).
The approximately $10,000 difference in price between lumpectomy and mastectomy is primarily the cost of post-lumpectomy radiation.
Using data on over 300,000 breast cancer patients in California diagnosed between 1997 and 2009, combined with data on the location of radiation treatment facilities, the authors estimate the welfare (consumer surplus) loss* of full coverage for lumpectomy and no coverage for lumpectomy relative to using mastectomy as a reference price for lumpectomy. To estimate the demand curve for lumpectomy, the authors convert travel time to a radiation treatment facility to price, monetizing by average hourly wage from the Bureau of Labor Statistics.
A standard course of post-lumpectomy radiation therapy requires 25 round-trips to a radiation facility, spread over 5 weeks. Our key economic assumptions are that travel time can be monetized and that preferences for reduction in travel time are analogous to preferences for any other equivalent price difference. These assumptions allow us to use the variation in distance to the radiation facility as if it were variation in the relative price of lumpectomy, thus identifying the demand curve. […] [We also assume] that there are not omitted patient characteristics correlated with both distance and demand for lumpectomy.
Results:
We estimate, for example, that the efficient “top-up” policy – in which patients pay $10,000 on the margin for a lumpectomy – increases the lumpectomy rate by 15-25 percentage points relative to the UK-style “no top-up” regime, and decreases the lumpectomy rate by 35-40 percentage points relative to the US-style “full coverage” regime. Our estimates suggest total welfare gains from the “top-up” policy of between $700 and $1,800 per patient relative to a “no top-up” UK-style policy and between $700 and $2,500 per patient relative to a “full coverage” US-style policy.
Those are the “ex-post” results, after onset of breast cancer. Considering ex-ante welfare, before onset of breast cancer, things change:
The results indicate how the (total) efficiency ranking of the top-up policy relative to the US-style full coverage policy depends on risk aversion. For the lowest value of risk aversion we consider, social welfare is higher under the top-up policy, but for higher values of risk aversion it is higher under the US-style full coverage policy. The full-coverage policy always delivers higher total welfare than the UK-style “no top up” policy for our calibrated values. This illustrative analysis suggests that focusing solely on ex-post efficiency analysis could miss an important part of the picture, and that the ex-ante risk exposure generated by top-up policies could be much more costly than the allocative efficiencies these policies may provide.
This makes slightly more formal the general knock on reference pricing—that it exposes consumers to greater risk. The paper’s charts are excellent. Here’s just one for the ex post consumer surplus analysis.
“L” in the axis labels is for “lumpectomy.” Area DEC is the consumer surplus loss of full lumpectomy coverage, relative to reference pricing. Area AEB is the consumer surplus loss of no lumpectomy coverage, relative to reference pricing.
But, see those seven dots in the lower right? Those are the data points from which the entire demand curve is estimated. As the authors are fully up-front about, this is an extreme, out-of-sample extrapolation: variation in the travel-time-cost of radiation therapy doesn’t come anywhere near the full range of price over which the demand curve extends. In light of this, what I like about the paper is that it makes explicit some welfare issues pertaining to reference pricing. In terms of leveraging data to actually estimate the size of consumer surplus gain/loss, there are significant limitations.
2) Medicare Hospital Price Cuts: “Cutting Medicare Hospital Prices Leads to a Spillover Reduction in Hospital Discharges for the Nonelderly,” by Chapin White (Health Services Research)
A demand inducement spillover occurs when one payer reduces the prices it pays and providers respond by increasing the volume of services provided to other payers’ patients. […] A capacity spillover occurs when payments for one group of patients become more or less generous, and, as a result, providers adjust their capacity and change the volume of services provided to all patients. […] Providers appear to adopt a general treatment style that they apply to their patient populations, rather than tailoring treatments based on each patient’s coverage [a treatment pattern spillover].
Using data for 129 markets in ten states over years 1995–2009, White studied the effect of changes in Medicare hospital prices on
the number of hospital discharges and days provided to the nonelderly by hospitals located in each market, and the mean nonelderly length of stay. We also measure the share of discharges for the elderly and the share of days provided to the elderly—these shares capture any possible shifts in hospital output away from the elderly.
Results:
[R]egression results show that decreases in Medicare prices are associated with decreases in inpatient hospital utilization among the nonelderly. A 10-percent Medicare price cut is associated with around a 5-percent decrease in discharges among the nonelderly and an even larger decrease in hospital bed-days. Changes in the Medicare price are not associated in any statistically robust way with changes in the nonelderly length of stay, nonelderly case mix, or with changes in the share of utilization provided to the elderly. These findings suggest that hospitals have only limited ability or willingness to shift their inpatient services away from the elderly in response to Medicare price cuts.
To give a sense of the magnitudes involved, we extrapolated our results to simulate the nationwide utilization effects of a 10-percent decrease in the Medicare price in 2012. That price reduction roughly matches the accumulated 10-year effect of the ACA on Medicare hospital prices. The reduction in the Medicare price leads to more than 1 million fewer discharges, and more than 9 million fewer hospital days, with the utilization reductions roughly evenly split between the elderly and nonelderly.
Unless hospital prices for the nonelderly go up considerably in response to Medicare cuts (and prior work shows they don’t) or utilization is shifted to other settings, this work suggests that Medicare price reductions might reduce health care spending beyond the Medicare program.
* If “consumer surplus” is a foreign concept, I recommend this short, accessible book.
12/12/2013 Austin FraktThe cost shifting literature keeps growing, and I keep tracking it. My latest AcademyHealth post has an update. Go read it because it’ll make you smarter without taking much of your time.
10/17/2013 Austin FraktIn 2011, Center for Medicare and Medicaid Services (CMS) actuaries made two predictions about the implications of Affordable Care Act (ACA) cuts to the prices Medicare will pay for hospitals services: (1) that they will cause 15% of hospitals to become unprofitable in a decade and (2) that they will be half those of commercial market prices by 2040. Recent work suggests that only one of these predictions is likely to be correct. A review of how hospitals react to Medicare cuts reveals which. You’ll find that review, by me, on the AcademyHealth blog.
