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

2. (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)

3. Motivation
Medicare is not financially solvent

4. 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?

5. “Don’t cross the streams!”

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

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

8. Apparent Cost Shift: History
Source: Frakt (2011)

9. 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

10. 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)

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

12. 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

13. 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.

14. 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

15. 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),

16. 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
had cost shifting as hospitals used market power up
Why hadn’t they before this time?
no cost-shifting If

17. 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.

18. Evidence: Wu (2009)
Data are from annual hospital reports to CMS ( )
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

19. 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
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

20. 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

21. 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),
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),
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),
White, C., & Wu, V. Y. (2014). How do hospitals cope with sustained slow growth in Medicare prices?. Health services research, 49(1),
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),