Opinion: Cost shifting theory is full of holes

Many hospitals claim that they have to raise prices because reimbursements from Medicare and Medicaid are falling, but studies have shown that raising prices is not the only option.

Hiking prices to cover the gap when Medicare does not pay its full share, called cost shifting, is a practice that goes back decades. However, hospital prices are more correlated with competition in the area than insurance, according to an op-ed in the New York Times written by Austin Frakt, a health economist who blogs at the Incidental Economist.

Mr. Frakt explains that patients on private insurance plans in rural areas have fewer choices for healthcare, so the hospitals can raise their prices because competition doesn't keep prices low. In urban settings, where there are more hospitals for patients to choose from, hospitals have no economic incentive to raise prices because patients can go to another provider who offers the same service for less, Mr. Frakt says.

Although the hospitals call this process cost-shifting, it is basic economics based on supply and demand, more like a spillover effect, according to the report.

Mr. Frakt says these trends are basic economic principles and, to illustrate, outlines the example of selling tickets to a movie that has low demand. If a moviegoer does not want to pay the price of a ticket because he deems it too high, the theater wouldn't raise ticket prices; rather, it would lower ticket prices in order to boost sales volumes.

The same theory applies to hospitals, Mr. Frakt says, as they move revenue volumes from Medicare and Medicaid to private payers by lowering private prices to make up for the lack of revenue coming from public ones, he writes.

"The evidence is clear: Today, hospital cost shifting is dead, and the spillover effect reigns," Mr. Frakt says. "A consequence is that public policy that holds or pushes down Medicare and Medicaid prices (or their growth) could put downward pressure on the prices hospitals can charge to all its customers and, in turn, on the premiums we pay to insurers."

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