Many health policy experts claim that hospitals engage in cost shifting. Cost shifting assumes that hospitals have some target profitability level and can demand is fairly inelastic. Thus, if public programs (i.e., Medicare or Medicaid) cut prices, hospitals ‘cost shift’ by raising prices to the privately insured in order to reach their target profitability level.
In fact, empirical evidence does indicate that many providers lose money treating Medicaid patients and, possibly, Medicare patients, but cover these losses with high private prices. Nevertheless, this finding is not conclusive evidence of cost-shifting.
A paper by Dranove, Ody, and Garthwaite poses the issue as follows:
This cross-sectional pricing data demonstrates that hospitals price discriminate but does not provide clear evidence of cost-shifting because it does not tell us whether providers would further increase private prices after experiencing a negative shock.
In fact, the authors use an exogenous source of variation, the stock market collapse of 2008, to determine whether hospitals cost shift. Because all hospitals experienced the stock market collapse and because patient demand also changed over this time period (likely due to many individuals facing unemployment and a loss of employer-sponsored health insurance), simply looking at cost shifting longitudinally is not useful.
Rather, the authors adopt a panel approach where they use the fact that certain hospitals experienced different levels of financial loss from the stock market collapse compared to others. The authors use data from Medicare hospital cost reports to measure changes in hospital endowments. Other data sources include: CMS impact files, the American Hospital Association Annual Survey, the Healthcare Information and Management Systems Society (HIMSS) dataset and some additional sources.
When applying this approach, the authors find “no evidence that the average hospital raises prices in response to losses in endowments.” Hospitals did make some changes in response to the financial crisis.
We find no evidence that hospitals cut staffing, which stands in contrast with how universities responded to the financial crisis. We do find that hospitals decreased large capital expenditures on advanced medical records and curtailed the offering of unprofitable services such as trauma centers and alcohol and drug treatment facilities. These reactions provide valuable information for evaluating the incidence of policies generating financial shocks for hospitals. Rather than simply impacting the prices paid by privately insured patients, these policies can result in broad changes in the quality and availability of health services for all patients.
- David Dranove, Craig Garthwaite, Christopher Ody. HOW DO HOSPITALS RESPOND TO NEGATIVE FINANCIAL SHOCKS? THE IMPACT OF THE 2008 STOCK MARKET CRASH. NBER Working Paper 18853.