Question

Describe the origins of claims of hospitals cost shifting?

Describe conditions under which hospital cost shifting can occur and its causality?

Describe price discrimination and its application to hospitals?

Answer 1

The definition, existence, and extent of hospital “cost shifting” are points of debate among participants and stakeholders in discussions of health care policy and reform. The academic literature defines the term precisely and characterizes the range of its effect. Even though that literature has grown considerably in recent years, not since the mid-1990s has it been systematically reviewed and summarized (Morrisey 1993, 1994, 1996; see also Coulam and Gaumer 1991). In this article, I update those older reviews, summarize the relevant features of and changes to health care policy, and place the results in today's policy context.

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). Cost-shifting is either an economic situation where one individual, group, or government underpays for a service, resulting another individual, group or government overpaying for a service (shifting compared to expected burden).It can occur where one group pays a smaller share of costs than before, resulting in another group paying a larger share of costs than before (shifting compared to previous arrangement). Some commentators on health policy in the United States elieve the former currently happens in medicare and Medicaid as they underpay for services resulting in private insures overpaying. In 1995, health affairsstarted a study testing the “cost-shifting” theory using a unique new data set that combines MarketScan private claims data with Medicare hospital cost reports, the study ran from 1995-2009. In May 2013 when the findings were released, the study found that a 10 percent reduction in Medicare payment rates led to an estimated reduction in private payment rates of 3 percent or 8 percent, depending on the statistical model used. These payment rate spillovers may reflect an effort by hospitals to rein in their operating costs in the face of lower Medicare payment rates.

A big decline in both auto accident and severe injury frequency has not produced a corresponding decline in loss costs. The slack has been taken up by inflated soft tissue injury claims fueled by hospital cost shift. Financially savvy hospital administrators and new software that “enhances” billing techniques have overcome claim deterrents so effectively that the industry seems unaware. There is an answer, but the industry may be satisfied with the status quo for now.

A 2008 report by the Insurance Research Council (IRC) provides empirical evidence that since 2000, a significant decrease in auto claim frequency has been mysteriously offset by an equally significant rise in severity, leaving loss costs essentially unchanged. Of particular note, the Insurance Research Council report points to a study by the National Safety Institute showing that improved automobile safety engineering has been lowering the frequency of serious injuries and deaths. This makes the rise in bodily injury and personal injury protection claim severity particularly vexing.It might be argued that because hospitals initially bill all of their patients at their chargemaster prices, they do not engage in "price discrimination"—the practice of charging different customers different prices for identical goods or services. Invoices at chargemaster prices, however, are insincere, in the sense that they would yield truly enormous profits if those prices were actually paid. The reality is that hospitals accept different payments from different payers for identical services, and that can properly be called price discrimination.
Could a public healthcare system use price discrimination—paying medical service providers different fees, depending on the service provider's quality—lead to improvements in social welfare? We show that differentiating medical fees by quality increases social welfare relative to uniform pricing (i.e. quality‐invariant fee schedules) whenever hospitals and doctors have private information about their own ability. We also show that by moving from uniform to differentiated medical fees, the public healthcare system can effectively incentivise good doctors and hospitals (i.e. low‐cost‐types) to provide even higher levels of quality than they would under complete information. In the socially optimal quality‐differentiated medical fee system, low‐cost‐type medical‐service providers enjoy a rent due to their informational advantage. Informational rent is socially beneficial because it gives service providers a strong incentive to invest in the extra training required to deliver high‐quality services at low cost, providing yet another efficiency gain from quality‐differentiated medical fees.