The issue of cost shifting has
taken on enormous policy implications. It is estimated
that unsponsored and undercompensated hospital
costs—one measure of cost shifting—has totaled
$21.5 billion in 1991.
The health services research
literature indicates that hospitals set different prices
for different payers. However, the empirical evidence on
hospitals' ability to raise prices to one payer to make
up for unsponsored care or lower payments by other payers
is mixed at best. No study has concluded that hospitals
have raised prices to fully adjust for such actions.
The extent of cost shifting is
limited by the market. When a hospital has market power,
it is able to set prices above marginal costs. However,
when a buyer has enough patient/subscribers and a
willingness to direct them to particular providers based
on price considerations, hospitals have less flexibility
in raising prices above costs. Thus, the extent of cost
shifting is limited by the market.
Cost shifting is not as easy as it
may have been in the past because the nature of hospital
and insurer competition has changed radically in the last
decade. While hospital quality, services, and amenities
still matter, some buyers are increasingly concerned
about the price they pay. Evidence from studies of PPO
and HMO negotiations with hospitals suggests that
hospitals' market power is eroding, at least in some
areas.
In areas with relatively few
hospital competitors and little PPO or HMO activity,
Medicaid and Medicare price reductions and uncompensated
care burdens will be partially absorbed by higher prices
paid by private payers. In more price sensitive markets
and in markets in which prices to private payers have
risen to those commensurate with the market power of
local hospitals, such cost shifting will not occur.
A market- based approach in
hospital pricing requires an explicit policy for the
uninsured. In a competitive market, a hospital that
traditionally cared for the uninsured by spending some of
its profits on them will be unable to do so, at least to
the same extent as it did in the past. Increased
competition in health care without consideration of the
uninsured will decrease the uninsured's access to care.