How Much do Hospitals Cost Shift? A Review of the Evidence

Abstract:     
Context: Hospital cost shifting - that private payers are charged more in response to shortfalls in public payments - has long played a role in debate over health care policy. Though there is considerable theoretical and empirical literature on the subject, it has not been critically reviewed and interpreted since Morrisey did so nearly 15 years ago (Morrisey 1993, 1994, 1996). Much has changed since then, both in terms of empirical technique and in the health care landscape. In this paper I critically examine the theoretical and empirical literature on cost shifting since 1996, synthesize the predominant findings, suggest their implications for the future of health care costs, and put them in the current policy context.

Methods: Relevant literature was identified by database search. Papers providing descriptive policy context are considered first since policy shapes the health care market landscape within which cost shifting may or may not occur. Theoretical work is examined second as theory provides hypotheses and structure for empirical work. Then the empirical literature is analyzed in the context of the policy environment and in light of theoretical implications for appropriate econometric specification.

Findings: Analyses and commentary based on descriptive, industry-wide hospital payment-to-cost margins by payer provides a false impression that cost shifting is a large and pervasive phenomenon. More careful theoretical and empirical examinations suggest that cost shifting can and has occurred, but usually at a relatively low rate. Margin changes are also strongly influenced by the evolution of hospital and health plan market structures and changes in underlying costs.

Conclusions: Policymakers should take hospital and insurance industry claims of inevitable, large scale cost shifting with a grain of salt. Though a modest degree of cost shifting may result from changes in public payment policy, it is just one of many possible effects. Moreover, changes in the balance of market power between hospitals and health care plans also have a significant impact on private prices. Since they may increase hospital market power, provisions of the new health reform law that may encourage greater provider integration and consolidation should be implemented with caution.

Number of Pages in PDF File: 35

Keywords: cost shifting, Medicare, hospital charges, health insurance, health policy

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