One of the principal arguments for passing healthcare reform legislation circled around the theory of cost shifting. In essence, when hospitals care for uninsured patients that don’t pay bills, or when they receive low reimbursements for Medicare or Medicaid patients, they charge insurers higher fees to make up for the losses.
The case, then, for healthcare reform was that insuring more patients would reduce the occurrence of cost shifting.
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But not everyone agrees that cost shifting is as prevalent as some think. A new study out of the National Bureau of Economic Research in Cambridge, Mass. found that when faced with financial distress, a majority of nonprofit hospitals don’t cost shift to make up for losses.
David Dranove and colleagues from the Kellogg School of Management at Northwestern University in Evanston, Ill. said there has been a longstanding interest in how hospitals respond to financial challenges like an increase in the number of uninsured patients or Medicaid cuts.
“It’s the ‘share-the-gain, share-the-pain’ strategy – when times are tough, hospitals would raise prices, and it is implied, but not stated, that they would lower prices when times are good,” he said. “It is so widely accepted that Justice Roberts in his Affordable Care Act decision notes that by expanding health coverage, hospitals would get more money from patients and would lower costs.”
Dranove said most of the current theories are based on decades-old research and he and his group had doubts as to whether private insurers really allow for dramatic price increases.
There aren’t a lot of quality studies performed on this topic because there haven’t been a lot of instances of cuts that were widespread enough to affect a large population of hospitals. The 2008 stock market collapse brought a sizeable hit to many hospitals’ endowments, offering the scenario Dranove was seeking.
What they found was that most hospitals did not take part in cost shifting. Ones with the most substantial market power (fewer than 10 percent of all nonprofit hospitals) were able to raise prices, but insurers appear to be resisting efforts when they can.
What they did find was that some cut back or delayed making major investments like purchasing electronic medical records. Others cut back on less profitable offerings like trauma centers or inpatient psychiatric services.
“This is suggestive, but not conclusive, evidence that hospitals in general have a hard time cost shifting in response to other financial setbacks,” Dranove said. “They are probably already charging what the market will bear. Markets force you to behave in a competitive fashion and when there is not a lot of slack, you eat losses. And there is not a lot of slack in the healthcare system.”
Austin Frakt, assistant professor of health policy and management at Boston University’s School of Public Health, said there is a lack of evidence that hospitals cost shift to a large degree, but reducing spending on technology and services may still be detrimental to the communities.
“These are cuts to quality (or could be), which affects all patients,” he said in a blog posting on The Accidental Economist. “So, though it may be wrong to presume hospitals cost shift, it is not necessarily wrong to presume that patient welfare could be affected by reduced revenue, whatever the source.”
After reviewing literature on cost shifting, Frakt estimates that about 20 cents of every dollar that hospitals lose through Medicare and Medicaid is made up through increases to private payers. The remainder, he said, is often comprised of cutting costs.
“Does that mean we’re through with arguing over cost shifting? Don’t bet on it,” he said in another blog post on the topic. “But, when you hear claims or implications of inevitable, large-scale shifting, be skeptical. The vast majority of shortfalls in public payments are absorbed by cost cutting.”