Health Insurance Hospitals Medicaid/Medicare Medicare

The End of Hospital Cost Shifting?

Medicare is cutting reimbursement to hospitals.  Austin Frakt (HSR 2013) gives some highlights findings from a CMS report:

[The ACA] will permanently reduce the Medicare payments hospitals would otherwise receive. Its ‘productivity adjustment’ will scale payments downward by the average rate at which private nonfarm businesses’ productivity increases. That rate has been estimated to be 1.1 percentage points per year…Actuaries for [CMS] have estimated that by year 2040, Medicare payment rates to hospitals will be half those of the commercial market, and lower still thereafter.

How will these reductions in hospital cost affect reimbursement rates for commercially-insured individuals?   Frakt provides three potential responses hospitals could take.

  • Cost shifting: Increasing the prices it charges commercially-insured individuals to compensate for reduced Medicare reimbursement.
  • Cost cutting.  Reduce cost for all patients to ensure average profitability across the entire Medicare/commercial payer mix.
  • Reduce profit margins.  Reduced Medicare reimbursement could simply eat away at hospital profits.

I look at each of these possibilities in more detail.

Cost shifting

Cost shifting may have been feasible in the 1980s when hospitals still had some market power to exercise, but recent evidence indicates that cost shifting may not be feasible.

Although there are circumstances under which hospitals could and did cost shift at high rates (e.g., in the 1980s; see Cutler 1998), recent work suggests that it is a far less pervasive and large phenomenon today than it might have once been (Frakt 2011)…Thus, cost shifting by hospitals now appears to be largely infeasible. Today’s insurers may possess market power that offsets that hospitals might otherwise exploit to raise prices. Put another way, hospitals may have already exploited their market power and lack further leverage to raise private prices.

Cost cutting

This is the most likely result according to Frakt.  Frakt cites an article by Wu and White (2013), which examines how changes in Medicrae payment policy affect hospital total revenue, expenses, and profits between 1996 and 2009.  They find that:

nearly all of the reduction in total revenue (90 percent) was offset by lower operating expenses. Of that, nearly 60 percent was in personnel, and the remaining was in non-personnel expenses.

These cost-cutting measures will affect patient outcomes.

Wu and Shen (2011) found that hospitals that faced large payment cuts from the 1997 Balanced Budget Act cut operating costs and staff and experienced increased mortality rates of heart attack patients relative to those seen at hospitals that faced smaller cuts.  They calculated that a 1 percent cut in payment results in a 0.4 percent increase in heart attack mortality rates.

Reduced profits

The Wu and White article finds that:

Reduced Medicare payments did not result in statistically significant reductions in profits among not-for-profit hospitals, because they fully offset lost revenues with reduced operating expenses. However, for-profit hospitals offset nearly all of Medicare inpatient revenue reductions with lower profit, suggesting they were operating closer to minimum cost than not-for-profit hospitals.

Thus, although there may be some reduction in profits due to cuts in Medicare reimbursement and additional consolidation of the hospital industry, it is not likely for profits to be reduced significantly over the long-term.



Frakt’s concluding remarks are instructive and I repeat them verbatim below.

Such a trade-off calls to mind what Mark Pauly expressed in a 2011 paper in Health Affairs, “Perhaps a little less quality for a lot less money might be acceptable to consumers and taxpayers, as we work to keep medical spending from siphoning off funds required for other needs” (Pauly 2011). Whether it is acceptable or not, it may be what consumers and taxpayers get.


  • Frakt, A. B. (2013), The End of Hospital Cost Shifting and the Quest for Hospital Productivity. Health Services Research. doi: 10.1111/1475-6773.12105
  • Cutler, D. 1998. “Cost Shifting or Cost Cutting? The Incidence of Reductions in Medicare Payments.” Tax Policy and the Economy 12:1–27.
  • Dranove, D., C. Garthwaite, and C. Ody. 2013. “How Do Hospitals Respond to Negative Financial Shocks? The Impact of the 2008 Stock Market Crash.” National Bureau of Economic Research Working Paper No. 18853.
  • Frakt, A. B. 2011. “How Much Do Hospitals Cost Shift? A Review of the Evidence.” Milbank Quarterly 89 (1): 90–130.
  • Pauly, M. V. 2011. “The Trade-Off among Quality, Quantity, and Cost: How to Make It—If We Must.” Health Affairs 30 (4): 574–80.
  • ·         Shatto, J. D., and M. K. Clemens. 2011. “Projected Medicare Expenditures under an Illustrative Scenario with Alternative Payment Updates to Medicare Providers.” Centers for Medicare and Medicaid Services, Office of the Actuary.
  • Wu, V., and C. White. 2013. How Do Hospitals Cope with Sustained Slow Growth in Medicare Prices? Health Services Research : [In Press].




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