Do hospitals need to make up payment shortfalls from Medicaid and Medicare by charging higher prices to privately insured patients? That theory, known as cost shifting, has been discussed considerably over the past few decades. But many recent studies have in fact suggested something else: lower medicare hospital payment rates for inpatient care might just lead to lower private payment rates.
Cost shifting is based on the notion that a hospital’s costs (staff, equipment, supplies, space) are fixed, with an event requiring a specific set of resources. Therefore when reimbursements don’t meet the hospital’s expenses the cost must be met in some other way. However, in reality hospitals as with any other industry face and respond to various market forces.
As was reported to Congress in 2011, it’s been hospitals’ underlying costs, not cost shifting, that have led to differences in prices charged to insurers and to Medicare shortfalls or profits. In fact, as noted in this New York Times editorial: “Today, hospital cost shifting is dead, and the spillover effect reigns. A consequence is that public policy that holds or pushes down Medicare and Medicaid prices (or their growth) could put downward pressure on the prices hospitals can charge to all its customers and, in turn, on the premiums we pay to insurers.” Good news indeed for consumers of health care and especially for those concerned with the long-term potential shortfall effects of reduced payments to Medicaid and Medicare.