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- Limited evidence of cost shifting. The paper argues there is minimal evidence supporting the notion of strong and continuing cost shifting by hospitals, where reductions in public payer prices lead hospitals to raise prices on private insurers to make up for losses.
- Cost cutting, not shifting. Hospitals are more likely to cut costs when they face reductions in public payments. This can potentially lower the quality of or restrict access to care, highlighting that cost shifting is not always the primary hospital response.
- Opposite effect often observed. Recent studies indicate that when public payer rates decrease, private prices tend to decrease as well, also suggesting hospitals respond differently than commonly assumed.
Private insurers often pay more to hospitals than public insurers like Medicare or Medicaid for the same services. This leads some stakeholders to conclude that hospitals engage in “cost shifting,” the notion that relatively lower public-sector payments cause hospitals to raise private prices to make up for losses. Whether cost shifting occurs is key to accurately assessing the impact of policy or budget decisions that change provider payment levels by public insurers.
This review first looks at key definitions and conceptual issues important for understanding discussions around cost shifting. It then examines the empirical evidence of whether substantial cost shifting occurs. Key findings of the review include the following:
- There is little evidence of a strong and continuing potential for cost shifting by hospitals. The most recently published studies tend to find the opposite — that reductions in payments by public payers are associated with reductions in private prices.
- Hospitals do not appear to regularly have excess, unused market power at their disposal, which tends to leave them without the ability to cost shift.
- In response to public payment reductions, hospitals are more likely to reduce costs than engage in cost shifting. Such reductions may decrease quality of, or access to, care for patients.
If cost shifting is not widespread or substantial — an idea gaining more support in the research and policy community — policymakers should not expect that changes in public payments will substantially affect private prices or premiums for private insurance. They should also not assume that changes to public payments will be benign for providers in that they will be directly offset by private insurer payments.
Although this review focuses mainly on hospitals, it has implications relative to physicians and other health care providers.
Authors & Contributors
Laurence Baker, PhD
External author
Knowles professor, professor of Health Policy, and senior fellow of the Stanford Institute for Economic Policy Research at Stanford University.
