EBRI Issue Brief

Hospital Cost Shifting, a Continuing Debate

Dec 1, 1996 16  pages


  • This Issue Brief examines the evidence on hospital cost shifting. It defines cost shifting, explores the incentives facing hospitals and payers, reviews and critiques the new evidence on cost shifting, and discusses the policy concerns that arise from the new learning.
  • Cost shifting has a precise and easily understood meaning. It does not mean that some payers pay different prices than others. Different prices are commonplace throughout the economy. Rather, cost shifting exists when the prices faced by one group of payers are higher because another group pays less. To be able to cost shift, a hospital must have market power, and it must not yet have fully exercised that power.
  • There has been a spate of recent cost-shifting studies. The better known studies focus on industrywide, revenue-to-cost margins by payer. They find that the extent of cost shifting declined in the mid-1990s. The methods underlying these studies have been criticized in the academic literature, with the strong suggestion that the studies overstate any true cost shifting.
  • Cross-sectional studies compared measures of prices across individual hospitals. These studies have failed to find evidence of hospital cost shifting. However, they suffer from a potential inability to control for levels of service, quality, and amenities that may simultaneously have changed as well.
  • Dynamic studies compare individual measures of hospital prices through time and allow each hospital to serve as its own control. These studies find no evidence of hospital cost shifting. As one analysis concluded: "We found no evidence to suggest that cost-shifting strategies that might protect hospital revenues in the face of financial pressure were undertaken successfully."
  • Rather than cost shifting, the existing evidence points to hospital competition limiting the provider's ability to raise prices. Whatever market power hospitals once enjoyed is disappearing—and with it the ability to cost shift.
  • This research suggests that Medicare reform or Medicaid restructuring will have little direct effect on the hospital prices that employers and their workers pay for health care. The author argues that cost shifting is dead.
  • However, the increased hospital competition necessarily squeezes hospital profits. This reduces the amount of charity care they can provide. Expect to see more and more examples of hospitals unable to provide care to nonpaying patients. This also suggests that care for the indigent will become a more pronounced public issue. This is a form of "cost" shifting, one that the "system" will need to deal with.