Cost Shifting in Healthcare CANW Fall 2017 Meeting DATE: September 29, 2017 PRESENTED BY: Peter Graven, PhD

(as percentage of Medicare) What is Cost Shifting? Charges (300%) Price/unit (as percentage of Medicare) Cost Shifting “Dynamic” “Changing prices for one payer when another price changes” Private (150%) ? Price Discrimination “Charging different payers different prices” Uninsured (120%) Medicare (100%) Medicaid (70%) Time Source: Author approximations of Cooper et al. (2015), Hadley (2003), Kaiser (2017)

Motivation Medicare is not financially solvent

Economists and Actuaries A couple personal notes Some questions for audience A scene from ghostbusters How many work with health insurance policies? Have you had to anticipate effects of public payment changes? How many expected private costs to go up? How many expected private costs to go down? Did they?

“Don’t cross the streams!”

Background Economists are skeptical of substantial and ongoing cost shifting because it defies conventional (and even modified) theory Monopolistic pricing strategies Immutable fixed costs

“Most Economists”… Source: Morrisey, M. A., & Cawley, J. (2008). Health economists' views of health policy. Journal of Health Politics, Policy and Law, 33(4), 707-724.

Apparent Cost Shift: History Source: Frakt (2011)

Apparent Cost Shift: History Late 1980’s, Yes, when Medicare initially started DRG payments we do see “dollar for dollar” increases in prices for private payers (Cutler, 1998) It is plausible that as cost-based reimbursement left, hospitals “discovered” their market power pricing ability. But they likely exhausted it 1990’s Managed care both threatened market power and cost issues. Medicare price reductions associated with private price reductions (not increases) In many markets payers negotiate as a percentage of medicare. So, when Medicare goes down or increases less, there is a nearly mechanical relationship

Apparent Cost Shift Instead, apparent cost shift is likely observation of competition related issues whereby less competitive areas are both less efficient (higher costs) and more able to charge private payers (higher prices) This is price discrimination (static) Not cost shifting (dynamic)

Apparent Cost Shift Explained? It appears that as Medicare margin decreases, private prices increases Private Prices Medicare Margin

Apparent Cost Shift Explained? But, if low Medicare margins are due to high costs in non-competitive areas, then the relationship is explained by competition instead Private Prices Non-competitive, high cost Competitive, low cost Medicare Margin

Economic Theory When Medicare price decreases (Pm), private price (Pp) decreases (opposite of cost shift) Feldman, R., Dowd, B., & Coulam, R. (2015). Medicare’s role in determining prices throughout the health care system. Mercatus Working Paper). Arlington, VA: George Mason University.

Economic Theory Monopoly w/segmented payer (Dowd et al 2006, Morrisey, 1994) In response to public price reduction may: increase private volume lower private prices Utility (not profit) Maximizing (Dranove, 1988) Maximize profits and also quantity or quality Thus may not fully exercise pricing power A downward shock could shift balance toward profits away from other objectives It still requires monopolistic pricing ability Strategic public payer (Glazer & McGuire, 2002) Public payers underbid knowing private will pay more to keep quality up But is reverse causation since public is reacting to high private rates in some areas

HHI=Sum of squared market shares. Larger indicates more concentrated Fulton, B. D. (2017). Health care market concentration trends in the United States: evidence and policy responses. Health Affairs, 36(9), 1530-1538.

Evidence: Cutler (1998) Uses changes in Medicare payments from policy changes Data from annual hospital reports to HCFA Total and Medicare revenues and expenses No case mix information (which may bias detection of cost shift) Low case mix hospital may have smaller change in Medicare revenue but increase costs and revenue. Instead use control for costs and just look at revenue Results 1985-1990 had cost shifting as hospitals used market power up Why hadn’t they before this time? 1990-1995 no cost-shifting If

Evidence: Fox (2008) Milliman authored report at the request of AHIP, AHA, BCBS, and Premera Data from 2006 AHA survey data, 2007 Fee Schedules, Proprietary commercial databases Cost shift defined as the difference between the actual payment and the payment amount that would have resulted in an equal margin by payer Termed “Cost shift”, it is actually showing price discrimination, not dynamic cost shift Results: 15% of commercial cost is shift from public to private payers At the request of AHIP, AHA, BCBS, and Premera.

Evidence: Wu (2009) Data are from annual hospital reports to CMS (1996-2000) Effect of 1997 Balanced Budget Act Outcome is change in private payment per discharge Controls for plan market power (actually HMO penetration), hospital market power (patient flow HHI), profit status, case mix, occupancy 1 dollar reduction leads to 21 cent increase Impact is limited by health plan competition

Evidence: White (2013) Data at market level (Dartmouth HRRs) since Truven’s MarketScan restricts hospital specific prices Possible benefit to insurers interested in population in a given area Use changes in Medicare payment rates at geographical and hospital-specific level 1995-2009 found 10 percent reduction in Medicare led to a reduction of 3 to 8 percent. May be a payment rate spillover to reduce operating costs in response “cost cutting” White (2014) shows 90% of lost Medicare revenue appears as reduced operating expenses Staffing is affected, service types are not targeted

Summary Unlikely cost shifting exists (still) “My hope is that the dynamic cost-shifting theory is hereby put to rest” (White, 2013) “the era of hospital cost-shifting appears to be over” (Frakt, 2014) To the extent it does still exist is likely to do with non-profit hospitals changing mission to increase profits It is possible given ACA effects on charity care

References Cutler, D. M. (1998). Cost shifting or cost cutting?: the incidence of reductions in Medicare payments. Tax policy and the economy, 12, 1-27. Dranove, D. (1988). Pricing by non-profit institutions: the case of hospital cost-shifting. Journal of Health Economics, 7(1), 47-57. Feldman, R., Dowd, B., & Coulam, R. (2015). Medicare’s role in determining prices throughout the health care system. Mercatus Working Paper). Arlington, VA: George Mason University. Fox, W., & Pickering, J. (2008). Hospital & physician cost shift: payment level comparison of Medicare. Medicaid, and commercial payers, Milliman. Frakt, A. B. (2011). How much do hospitals cost shift? A review of the evidence. Milbank Quarterly, 89(1), 90-130. Frakt, A. B. (2014). The end of hospital cost shifting and the quest for hospital productivity. Health services research, 49(1), 1-10. Morrisey, M. A. (1994). Cost shifting in health care: Separating evidence from rhetoric. American Enterprise Institute. White, C. (2013). Contrary to cost-shift theory, lower Medicare hospital payment rates for inpatient care lead to lower private payment rates. Health Affairs, 32(5), 935-943. White, C., & Wu, V. Y. (2014). How do hospitals cope with sustained slow growth in Medicare prices?. Health services research, 49(1), 11-31. Wu, V. Y. (2010). Hospital cost shifting revisited: new evidence from the balanced budget act of 1997. International journal of health care finance and economics, 10(1), 61-83.