Code Red: Two Economists Examine the U.S. Healthcare System

October 12, 2009

AHIP and Cost-shifting: A Ready-Made Smokescreen

Filed under: Health insurance,Health Reform — David Dranove and Craig Garthwaite (from Oct 11, 2013) @ 4:59 pm

AHIP (America’s Health Insurance Plans) is lobbying hard in advance of tomorrow’s Senate vote on Senator Baucus’ health plan.   AHIP claims that proposed cuts in Medicare payments will add to private health insurance costs due to “cost shifting,” as hospitals raise their prices in order to make up for Medicare shortfalls.  If AHIP is correct, then a lot of policy advisors on both sides of the political aisle are awfully stupid.  Hospitals have more or less agreed to these cutbacks in exchange for seeing more folks with health insurance. It is simple horse-trading – hospitals get more money from new insured patients and get less from those with Medicare.  But if hospitals can cost-shift, as AHIP claims, then they aren’t making any concessions at all.  What they give to Medicare they take from private insurers, and the policy makers who view this as a zero sum game for hospitals have been bamboozled.  I find that unlikely.  Instead, I think that AHIP is trying to bamboozle us.

Cost-shifting is one of the oldest ideas in health economics.  Old enough to die from natural causes.  But it refuses to die, kept alive by flat-earthers and other folks who can’t come to terms with reality.  The idea has some intuitive appeal:  If someone cuts payments to a provider, that provider makes it up by raising prices on someone else.  But it raises a simple question:  why wasn’t the provider charging higher prices all along?  To believe in cost-shifting, we have to believe that these “greedy” hospitals are only greedy part of the time.   Perhaps there was a time, back before health care markets displayed even a smidgeon of competition, when nonprofit hospitals might not charge all the market could bear.  But today’s hospitals negotiate to get the best prices they can all the time.  They have to; anything less could spell financial ruin.  And it would take an extraordinarily generous insurance company (oxymoron alert!) to say to hospitals, “normally we wouldn’t give you a pay increase but we feel sorry for you because of Medicare and all that.”

Here is a good gut check.  If cost-shifting was so easy, why are urban hospitals that depend on Medicaid patients struggling to survive?  Couldn’t they just shift the costs onto private patients?  The answer is that they can’t cost-shift.  And claiming that they can only belittles the efforts of hospital executives to cope in a difficult reimbursement environment.  The empirical evidence is mostly dismissive of cost-shifting — if it occurs at all, it is rather small.

Perhaps I should give AHIP credit for subtlety.  If the scale of Medicare cutbacks exceeds the scale of new enrollments, some providers could fail, allowing others to increase their bargaining clout.  This could eventually have the same effect as AHIP’s cost-shift.    But this would require total capitulation by both hospitals and America’s seniors.   AHIP may have more clout than do hospitals, so I could see the hospitals losing out.  But AARP holds a candle to no one.  So this scenario seems unlikely.

If the cost-shifting argument is just a diversion, as I suspect, then what exactly is AHIP’s game?  It seems to me that AHIP’s real agenda is simple – it doesn’t want any government intervention.  The status quo looks pretty good to the insurance industry.  Why take chances?  But why admit the truth when there is a ready made smokescreen?

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