Health care cost shifting

There appears to be a debate taking place on whether cost-shifting takes place within the health care industry. Basically the question is whether hospitals charge more to some patients -- typically those with private insurance -- to make up for money lost on those insured by a government-run program such as Medicare, whose reimbursement rates may not always cover costs.

Megan McArdle examined this question yesterday and seemed to conclude that, yes, cost-shifting does occur, at least in the short-run.

Advocates of government-run health care, however, have an obvious interest in down-playing talk of cost-shifts. If cost-shifting is real, and a new government health care entity is on the way, that could mean higher costs for the rest of us.

Seeking to counter the cost-shift argument is Princeton economist Uwe Reinhardt, which this blog last encountered trying to use federal flood insurance as an example of a great government program. Boiled down to its core, Reinhardt's argument is that price-shifting doesn't comport with economic theory as it implies private insurers are incapable of resisting the price-shift burden, which he doesn't think is true.

"...The tall tale implies that private insurers do not have the power to control health spending," he says.

But why wouldn't this be true? To control costs insurers either have to deny care or find cheaper hospitals to send patients to. But if all hospitals face low Medicare reimbursement rates then it's likely all hospitals are also looking to do some cost shifting. Denial of care meanwhile -- basically the HMO approach -- caught all sorts of criticism when it was in its heyday in the 1990s.

This reminds me of the famous quip of an economist being someone who observes something in practice and wonders if it would work in theory.

Apparently I'm not the only one who thinks the Princeton economist should spend some time enmeshing himself in the real world instead of a text book as evidenced by this comment:

I have worked in healthcare for over 30 years, over 20 of those years in Management in the Clinical Laboratory. I agree with comment #3. Any hospital I ever worked for has had an obligation to provide care to a patient regardless of his/her ability to pay. This is as it should be. We do not make widgets, we save people’s lives. I work in this “industry” because I want to help people and I am proud of my service to others.

I have also lived through many management budget meetings where we were told that there would be lay-offs, no raises, an increase in co-pays for benefits, because the hospital will lose money because the % of Medicare patients was higher than expected and hospitals always lose money on Medicare patients.

I know how much I spend on doing a test and I know what my Medicare reimbursement is for that test and it is almost always the case that my reimbursement is pennies on the dollar for what it costs.

I am in full suppost for Health Care Reform. NO ONE should be denied care or coverage for that care. But, if a public option works like Medicare, hospital wil not survive. We do survive now on cost shifts (though not as great as private insurers would have you beleive) and we survive by cutting jobs, which has a strong impact on quality of care.

Instead of wasting time talking about non-issues like “death panels”, we need sincere discussion of how to solve this crisis.

-- Faye

And this one:

Reinhardt,

You should get out of Princeton and spend one month in ICUs and on floors in a university hospital in Camden or Newark.

In these ICUs you will likely see patients who have never had health insurance other than Medicaid or Medicare, and who are spending long long time there, soaking up healthcare money. Ask how many multispecialty consults, scans, and procedures these patients had, and then find out how much the hospital gets paid for treating these patients.

The hospital cannot print money like US government does. If it wants to stay in business, it has to spread the costs onto those who do pay: ‘private’ patients, or their respective insurance carriers. In fact, many of hospitals who have high percentage of Medicaid/Medicare patients operate on brink of solvency, including my alma mater medical school.

This is how it works. Your talk about ‘private insurers resisting cost shift’ does not make any sense. Insurance don’t control the costs. Hospitals can control the costs if they start denying care, but NOBODY CAN CONTROL THE DEMAND, and hence nobody can truly control the costs. There is an unsatiable demand on medical services, which translates into infinite services, ‘controlled’ only by patient’s death or bankruptcy. This is the core of rising medical costs.

— Mark Johnson, MD

Ivy League economist, meet the real world.

Update: I should note that cost shifting is not always a bad thing. All those people sitting in first class make it possible for airlines to charge much cheaper prices for coach.