The Cost-Shift Payment ‘Hydraulic’: Foundation, History, And Implications

Abstract

Hospital cost shifting is alive and well, but its premature demise could have negative effects on all hospital patients.by Allen Dobson, Joan DaVanzo, and Namrata Sen ABSTRACT: The cost-shift payment "hydraulic" is an integral component of the fragmented U.S. health care financing system. If private payers' acceptance of the cost-shifting burden were to erode, our system of health care financing could become unstable. This is especially true for the hospital industry. In this paper we provide a series of examples of cost shifting and a historical profile of the cost shift in the hospital industry since 1980, noting that cost-shifting pressures seem to fluctuate over time and across health care markets. Cost shifting need not be dollar per dollar, as hospitals can absorb some degree of costshifting pressure through increased efficiency and decreases in service provision. [Health Affairs 25, no. 1 (2006): 22-33] D u r i n g t h e pa s t t w e n t y y e a r s , documentation of hospital cost shifting has accumulated in the health services research literature; at the same time, some economists have maintained that cost shifting either does not exist or is "dead." Several researchers have defined the cost shift and described the history of the debate in both conceptual and empirical terms. 1Those who advocate for the existence of cost shifting point to differential hospital payment-to-cost ratios across payers and to increased premiums paid by private-sector payers at the same time public payers receive rate reductions.2 In 1992 the Prospective Payment Assessment Commission (ProPAC) estimated that privately insured patients were being charged, on average, 28 percent more than costs.3 Those who argue against the existence of cost shifting cite profit maximization, selective contracting, and price competition as precluding hospitals from shifting costs, maintaining an "impossibility theorem" associated with classical economic theory. 4 They posit that firms aim to maximize profits and that, as such, hospitals would charge private payers the highest price permitted by the market. 5Selective contracting by managed care plans meant that hospitals began to compete on price, which further hindered their ability to raise prices to selected pay-2 2 J a n u a r y / F e b r u a r y 2 0 0 6 M i s s i o n V s . M a r k e t

Variation in Hospital Costs, Payments, and Profitabilty for Cardiac Valve Replacement Surgery

“…The influence on hospital pricing strategy for private insurers on Medicare's administered payment system has been the subject of considerable analysis and debate under the rubric of ''cost shifting'' (Dobson et al 2006;Zwanziger and Bamezai 2006). Many hospitals and private insurers and some policy analysts have argued that underpayments by Medicare relative to the costs of treating its beneficiaries impel hospitals to increase prices to private insurers (Dranove and Satterthwaite 2000;Ginsburg 2003; Lee et al 2003;Fox and Pickering 2008).…”

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“…1 Among the greatest challenges for both urban and suburban communities today is the growing difficulty hospitals face meeting the needs of poor and uninsured residents while surviving economically in an evercompetitive health care environment. 2 At the same time, federal, state, and local governments are reassessing their financial commitments to safety net facilities as political pressure mounts to contain or reduce costs associated with Medicaid and charity care.…”

Hospital Prices in Indiana: Findings from an Employer-Led Transparency Initiative

“…Because of those underpayments, hospitals are compelled to charge high prices to their privately insured patients merely to stay afloat (Dobson, DaVanzo, and Sen, 2006). …”