Goal Statement: When Public Payment Declines, Does Cost-Shifting Occur? Hospital and Physician Responses

Sponsored by The Robert Wood Johnson Foundation under its Changes in Health Care Financing and Organization (HCFO) initiative and conducted by AcademyHealth
November 13, 2002 - Wyndham Washington, Washington, D.C.

Goal Statement

For at least 30 years, different federal administrations have taken varied approaches to imposing health care cost control policies. The Nixon and Carter administrations aimed to curtail inflationary cost pressures across the entire health care system, for example, while the Reagan and subsequent administrations developed strategies that only address public programs, particularly Medicare and Medicaid.

When researchers and policymakers evaluate Medicare-only payment policies, one of the critical issues they must address is who bears the burden of such payment reductions. Is it the hospitals, whose reimbursement rates are directly reduced, or other payers, particularly private employers who provide health insurance to their employees? In short, do providers "cost shift" (i.e., raise prices to one set of payers in response to lower payments from another)? In the case of Medicare and Medicaid, do hospitals and physicians respond to payment reductions by cost-shifting to private payers?

Some economists argue that, theoretically, cost-shifting should not occur. Providers with market power should be profit maximizers, they say, who exercise their market power on all payers at all times and not selectively, based on temporary financial conditions. Whether or not cost-shifting occurs in reality has been difficult to determine. Research on the topic has been inconclusive, with some studies suggesting that hospitals do indeed shift costs from Medicare to private payers, and other investigations finding that they do not. Moreover, the bulk of the literature on cost-shifting has become dated: Most studies were published in the mid-1990s and drew on data from the late 1980s.

The Balanced Budget Act (BBA) of 1997 brought the issue of cost-shifting to the fore once again. Some anecdotal reports suggest that hospitals have reacted to declining, post-BBA Medicare margins by adopting more aggressive negotiating positions with health plans and self-funded employers in order to obtain higher payment rates. On the other hand, some believe that physicians, often with less market power than hospitals, have been subject to shadow pricing of the Medicare fee schedule by private plans. In the past, the issue of the relationship between Medicare payments and private payments has not received much attention because physicians had not been subject to significant BBA cuts. However, in 2002 physicians saw their Medicare payments cut by 5.4 percent, with additional cuts scheduled for the next few years.

The purpose of this meeting is to revisit the issue of cost-shifting among payers by bringing together economists, hospital administrators, physician practice managers, researchers, and public and private payers. Speakers will address questions such as:

Does cost shifting exist and under what market conditions?
Does the phenomenon vary between hospitals and physician markets and between Medicare and Medicaid?
How can we reconcile economic theory about profit maximization and evidence of cost-shifting?
Should Medicare payment policy to hospitals and physicians provide subsidies for uncompensated care and for private payers, who otherwise might experience cost-shifting?
More broadly, at a time of dramatically escalating cost pressures on all payers, should federal policy address total system costs or be limited to the costs associated with the beneficiaries of federal programs?
Are there additional public policy implications of cost-shifting?

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