The opposite of cost shifting

From “Hospital volume responses to Medicare’s Outpatient Prospective Payment System: Evidence from Florida,” by Daifeng He and Jennifer Mellor (JHE, 2012):

On average, hospitals that experienced rate cuts under OPPS [Medicare’s Outpatient Prospective Payment System] either decreased or saw no change in Medicare volume but increased private FFS volume. Moreover, when we account for heterogeneous responses based on a hospital’s exposure to OPPS (measured by Medicare share at baseline), we find that highly exposed hospitals responded to payment cuts with larger increases in private FFS volume than did less exposed hospitals. In terms of Medicare volume responses to rate cuts, the highly exposed hospitals responded with smaller decreases, and in some cases increases, compared to less exposed hospitals. These results are consistent with highly exposed hospitals experiencing larger income effects in light of payment cuts, and we view these results as consistent with the theory of provider induced demand.

The volume shift from Medicare to privately insured patients is also the opposite of what one would expect under cost shifting. Or, to put it another way, it is what one would expect if hospitals are profit maximizing. The way to attract more privately insured patients (i.e., to increase volume of them) is to offer lower prices, not higher ones as the cost shifting theory predicts.

The profit-maximizing volume shift theory has been covered on TIE before. More on cost shifting of various types in the FAQ. If you’re in a hurry, you can’t go too far wrong in assuming cost shifting doesn’t happen. That might not always and everywhere be quite right, but it is a good, first-order approximation and, in the long-run, has to be true. (If you disagree, read the FAQ first.)

An ungated, working paper version of the paper quoted above is here.


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