The Affordable Care Act (ACA) has allowed states to expand Medicaid. Medicaid pays hospitals prices that are lower than those paid by private insurers, although the price difference varies from state to state. Does this cause hospitals to charge private insurers even more to make up the difference, a cost shift?
Despite a substantial body of evidence to the contrary, many people believe hospitals shift costs in this way. For example, in 2014, Don George, MBA, the president and CEO of Blue Cross Blue Shield of Vermont wrote, “When government reimbursements are insufficient to cover the cost of the services a facility provides to Medicare or Medicaid beneficiaries, hospitals charge patients with private insurance enough to cover not only the cost of their services, but the shortfall created by government reimbursements as well.”
In truth, it’s been nearly 2 decades since any rigorous study has found evidence of substantial cost shifting. Recent work has found the opposite effect—when public programs pay hospitals less, so do private insurers. In a 2013 study published in Health Affairs, Chapin White, PhD, MPP, now a senior policy researcher at Rand Corporation, found that a 10% reduction in Medicare payments to hospitals was associated with a nearly 8% reduction in prices hospitals charge private insurers. Another study by him and Vivian Wu, PhD, now at the University of Southern California, published in Health Services Research in 2013, found that a reduction in hospital inpatient revenue from Medicare was associated with an even larger decline in total revenue, also suggesting hospitals cut prices charged to private payers.
These kinds of price spillovers make some sense. By lowering private prices in response to reduced public ones, a hospital can increase its chances of inclusion in more plans’ networks, thereby attracting more privately insured patients. So long as private insurer prices remain above public ones, this approach maximizes revenue or profit.
In contrast, cost shifting only makes sense if hospitals do not fully exploit their market power. If they hold some in reserve and leverage it to negotiate higher private insurer prices just when facing public payment shortfalls, that leads to cost shifting. Although this strategy is possible, it just doesn’t seem to be happening.
But most work on cost shifting focuses on Medicare, not Medicaid. Maybe it is different for Medicaid. In an article for the Galen Institute, Grace-Marie Turner, the organization’s president, and Avik Roy, then a senior fellow with the Manhattan Institute, claimed that Medicaid expansion includes a “hidden tax” by raising private premiums—a cost shift. However, a recent study in the Journal of Health Economics directly rejects this theory. In it, Kathryn Wagner, PhD, MA, of Marquette University, examined consequences of pre-ACA Medicaid expansions for disabled individuals permitted by the the Omnibus Reconciliation Act of 1986 (OBRA). This act allowed states to offer Medicaid eligibility for disabled individuals with incomes up to 100% of the federal poverty level, an increase from 74%. By 2003, 20 states and Washington, DC, had brought disabled Medicaid eligibility up to the OBRA threshold.
A prior study by Wagner showed that for every individual who obtained Medicaid coverage under the OBRA expansion, one individual lost private coverage. In other words, the Medicaid “crowd-out” (substitution of public insurance coverage for private insurance) was 100%. Since private insurers pay hospitals at rates higher than Medicaid, one might hypothesize that hospitals responded by raising prices charged to private insurers, a cost shift.
Wagner found that they did not cost shift. For every percentage point increase in Medicaid eligibility, the average hospital charge to private insurers decreased 1.2%, or $1,100. This is another nail in the coffin of the cost-shifting argument.
Even if hospitals do not cost shift, they still cross-subsidize. The additional revenue hospitals receive from higher payments from private insurers enable the provision of less profitable services. But this isn’t cost shifting unless there is a causal, dynamic connection in which private prices rise because of public revenue shortfalls.
Effects of Market Power
A perfectly reasonable theory suggests that causality may, in fact, run the other way. In Health Affairs, researchers found that hospitals with greater market power charge higher prices, as we would expect. Facing little financial pressure in the market, they also have higher costs. Those costs exceed public programs’ fixed prices, so these hospitals end up with negative Medicare and Medicaid margins. The authors also found that hospitals with less market power, because they face greater competition, charge private insurers less, have lower costs, and therefore earn a profit on public programs’ lower prices.
An analysis by the Medicare Payment Advisory Commission found that hospitals with low rates of profit from private payers had costs 9% below the national median and a Medicare profit margin of 6%. But, hospitals that profited more from private payers had costs 2% higher than the national median and negative Medicare margins (−8%). In other words, it is hospitals’ underlying costs, driven by competition, not cost shifting, that lead to differences in prices charged to insurers and shortfalls or profits from public programs.
There’s another reason not to fear a cost shift from the ACA’s Medicaid expansion. Contrary to some expectations and claims, it does not appear to crowd out any private coverage. If it substitutes for anything, it’s likely offsetting uncompensated care. That would raise hospital revenue, not decrease it.
The evidence is substantial. Hospitals do not cost shift from Medicare or Medicaid shortfalls. Hospitals that face lower revenue will not raise prices charged to private plans as a consequence of the ACA’s Medicaid expansion.
About the author: Austin B. Frakt, PhD, is the Associate Director of the Partnered Evidence-based Policy Resource Center, Veterans Health Administration; an Associate Professor at Boston University’s School of Medicine and School of Public Health; and a Visiting Associate Professor with the Department of Health Policy and Management at the Harvard T.H. Chan School of Public Health. He blogs about health economics and policy at The Incidental Economist and tweets at @afrakt. The views expressed in this post are that of the author and do not necessarily reflect the position of the Department of Veterans Affairs, Boston University, or Harvard University.
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