Cost Shifting

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A Tale of Two Bounties: Can Physicians Cost Shift from Medicare to Private-Pay Patients

April 20, 2010 in Medicaid/Medicare, Physician Compensation | 2 comments

Do physicians cost shift after Medicare reduces reimbursement rates?  A paper by Rice et al. (1999) examines whether or not this in fact occurred after Medicare reduced payment for surgical procedures in the late 1980s.  To be more specific, “The Omnibus Budget Reconciliation Act of 1989 (OBRA-89) reduced Medicare physician payment rates for thirty-six groups of so-called overvalued procedures, covering 245 individual procedure codes.” The study examines the impact of these changes using data from 1988-1991 covering the frequency of 17 major surgical procedures in 182 hospitals.  The data on privately insured individuals was obtained from the Commission on Professional and Hospital Activities (CPHA) a convenience sample of 3.7% of U.S. hospitals.

To control for omitted variable bias, the authors used a fixed effects specification.  This framework averages the effect of changes in Medicare reimbursement on quantities within each hospital.  Thus, it can control for time-invariant hospitals characteristics, but it cannot control for unobserved hospital characteristics which vary over time.

In the study period, “privately insured patients brought in far more revenue per hysterectomy than did Medicare patients: $1,538 versus $885, a ratio of 1.74…Typically, Medicare paid 60 to 70 percent as much as private insurers before the reductions in Medicare payments.”

Using this data and the empirical framework outlined above, the authors find that Medicare fee reductions increased the volume of privately insured service only in some cases.  “Of the seventeen procedures groups, twelve had the expected negative signs and seven of the twelve were statistically significant at the 5 percent or 10 percent level…”  Additionally, it appears that in some cases, a decrease in Medicare fees increases private-pay services even for procedures unrelated to those that experienced a Medicare fee decrease.  For instance, when Medicare cut cataract reimbursement rates, ophthalmologists supplied more services to private-pay patients, but not necessarily more cataract surgeries.

One drawback of this study is that it is fairly old and takes place before the rise of managed care.  Because managed care organizations can institute utilization restrictions, it is unclear if Medicare price decrease will increase the quantity of services supplied to private-pay patients as much now as they did in the late 1980s.

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Do Hospitals “Cost Shift” to the Privately Insured when Medicare Reduces Prices?

March 23, 2010 in Health Insurance, Hospitals, Medicaid/Medicare | 7 comments

Many health policy experts believe that when Medicare or Medicaid decrease prices, hospitals will increase the prices they charge to the privately insured.

Does this make sense?  Ginsburg (2003) summarizes the debate:

Most executives in hospitals, physician organizations, health plans, and businesses have long been convinced that reductions in rates paid to Medicare and Medicaid lead directly to higher payment rates charged to private payers. But most economists who have published on the topic express strong skepticism about the possibility that cost shifting can and does occur.  Not only do they point to empirical analyses that fail to obtain results supporting the existence of cost shifting, they also argue that cost shifting is conceptually impossible. The crux of their argument is the question of why providers with the ability to increase revenue through increases in prices to private payers would not have already exhausted such capacity prior to reductions in payment rates.

Ginsburg argues that cost shifting can occur.  Many hospitals are non-profits whose goal is not profit maximization.  Instead, they may try to maximize the quantity of patient care subject to a constraint of fiscal solvency.  The board of directors for many hospitals is made up of community leaders and physicians rather than managers, which further dilutes the profit motive.  When Medicare or Medicaid reduces reimbursement rates, non-profits may increases prices charged to private insurance companies to insure that they will break even.  Additionally, for-profit hospitals may also be able to raise the rates they charge private insurers only after a Medicare or Medicaid fee cut because they must compete with non-profit hospitals on price.

Although Ginsburg offers a compelling argument that cost shifting could occur, he does not provide empirical evidence that it does occur in reality.

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