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Market Conditions Can Allow Providers to Shift Costs to Private Payers to Offset Government Cuts, Health Affairs Article Says

Forum Examines Controversial Issue: Can Providers Offset Medicare, Medicaid Fees by Raising Prices for Other Insurers?

News Release
Oct. 8, 2003

Alwyn Cassil: (202) 264-3484
Jon Gardner, Health Affairs, (301) 593-3844

ASHINGTON, D.C.—Hospitals and physicians likely can raise prices to private insurers to offset payment reductions from Medicare and other government health programs if market conditions are right, according to a Health Affairs article that clashes with traditional health care economic theory.

Economist Paul Ginsburg, president of the Center for Studying Health System Change, writes that while most economists are skeptical that such "cost shifting" occurs, he believes that health care providers under certain market conditions can and do raise prices when government programs cut payment rates. The increasing market power of hospitals and physician organizations makes it more likely that they will increase prices to private insurers in response to reductions in administered prices from government programs.

Ginsburg’s article is one of three in a forum on the controversial topic of health care cost shifting published today on the Health Affairs Web site.

Many economists point to a lack of data indicating that cost shifting occurs, arguing that if providers could raise prices to private insurers, they would do so independently of the actions of Medicare, Medicaid, and other government programs. If cost shifting does occur, however, it should be a factor that policymakers consider when changing Medicare and Medicaid payment rates.

Ginsburg proposes a "conceptual basis" for the existence of cost shifting, contending that many factors keep hospitals and physicians from charging the highest possible prices to private insurers as long as government reimbursement is healthy. Among those factors are community representatives on the boards of not-for-profit hospitals, the charitable mission of not-for-profit hospitals, and competition with not-for-profit hospitals that keeps prices down at for-profit hospitals.

Providers’ ability to increase prices to commercial health plans when government payment rates drop hinges on whether they have enough market or leverage over private insurers-as has happened in many markets in recent years.

"The conditions of the mid-1990s, with extensive managed care and narrow provider networks, are the least favorable to cost shifting and thus make it less likely that it will be detected through empirical analysis," Ginsburg says. "However, current conditions, with greater concentration of hospitals and marketplace demands on health plans to offer broad provider networks, have likely increased the market power of hospitals and some physician specialists."

Ginsburg also says that the effects might have been more pronounced in small and rural communities: "Hospitals probably have more market power in smaller communities because concentration tends to be higher. Providers in small communities also might face more effective pressures to keep rates as low as possible. Both combined suggest that cost shifting has the potential to be more extensive. Indeed, many in contact with the insurance industry have noted sharp increase in rural hospital payment rates to private insurers in response to Medicare payment rate reductions."

In an accompanying paper, Jason Lee, president of Health Policy Consulting LLC in Bethesda, Md., and three colleagues write that cost shifting doesn’t often enter into discussions of setting Medicare and Medicaid payment rates because it gets lost in the larger politics of the federal budget. Health care executives and state policymakers are certain that cost shifting occurs, the authors write, with state policymakers making explicit decisions on Medicaid payment rates based on which facilities are best able to shift costs to the private sector. Meanwhile, in a third paper, Michael Morrisey argues that cost shifting occurs only because of a lack of competition in the health care marketplace, and to eliminate the threat of cost shifting we should make health care markets more competitive.

The articles can be read at the following Web addresses:

· Ginsburg:
· Lee:
· Morrisey:

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Health Affairs, published by Project HOPE, is a bimonthly multidisciplinary journal devoted to publishing the leading edge in health policy thought and research.

The Center for Studying Health System Change is a nonpartisan policy research organization committed to providing objective and timely insights on the nation’s changing health system to help inform policy makers and contribute to better health care policy. HSC, based in Washington, D.C., is funded exclusively by The Robert Wood Johnson Foundation and is affiliated with Mathematica Policy Research, Inc.


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