New Data on the Cost-shifting Debate Published in the National Bureau of Economic Research

New research published by the nonprofit, nonpartisan National Bureau of Economic Research provides new data on a longstanding debate in health economics and health policy:  whether or not hospitals “cost-shift” by adjusting prices with private insurers following reductions in public funding.  The new analysis shows that between 2010 and 2015, hospitals reacted to reduced Medicare payments by negotiating 1.6 percent average higher payments from private insurers,  increased prices that added an average of $86,500 per hospital for acute care claims for privately insured patients to offset reimbursement penalties averaging $153,000 per hospital that were triggered by the Affordable Care Act’s (ACA’s) Hospital Readmission Reduction Program (HRRP) and the Hospital Value Based Payment Program (HVBP).

George Washington University Milken Institute School of Public Health Associate Professor Michael Darden, PhD, served as a co-lead author for the research, published as National Bureau of Economic Research working paper #24304, “Hospital Pricing and Public Payments.”  Identifying potential cost shifting and predicting when it might occur, is “critical to understanding the effects of future public payment reductions and in guiding future health policy more generally,” Darden and his colleagues explain.

The research team used data from the Health Care Cost Institute, a non-partisan, non-profit organization with the goal of providing complete, accurate, unbiased information about health care utilization and costs to enhance understanding of the U.S. health care system.  The team developed a sample of 1,644 community hospitals in urban areas, using data maintained by the HCCI on all claims made for acute care hospital admissions by three national commercial insurers.

“This analysis shows very clear evidence of cost-shifting and demonstrates the unintended consequences of large cost-containment policies,” said the paper’s other co-lead author, Eric Barrette, PhD, Director of Research at the Health Care Cost Institute. “At a high level, the perception of cost-shifting has existed for a long time, but the evidence of it actually happening has been mixed. The complexity of the hospital market, the difficulty of measuring private payments, and diversity in how hospitals respond to cuts in public payment make cost-shifting analyses very difficult. Through availability of quality data from public and private sources, we were able to accurately measure the impact of these policy changes.”

The ACA’s HRRP penalizes hospitals with 30-day readmissions exceeding a certain threshold by reducing Medicare payments and the HVBP reduces Medicare payments to all hospitals but incentivized them to provide quality care with payments.  The researchers used information on HRRP and HVBP penalties/rewards and other cost information from the Centers for Medicare & Medicaid Services’ Healthcare Cost Report Information System. The private insurance payment data cover approximately 28 percent of individuals under age 65 with employer-sponsored health insurance. “Our data include roughly 50% of inpatient prospective payment hospitals in the United States from 2010 to 2015,” the researchers wrote. 

“Cost-containment strategies have far-reaching effects that impact the entire health system,” Darden said. “While these consequences cannot always be known or avoided, it is impractical to assume that there would not be some effort to recoup this lost revenue.”

The researchers note that cost-shifting as a result of public payment reductions was largest among hospitals with larger shares of private insurance patients.

“We find no evidence that hospitals change their services or treatment patterns following a decrease in public payments, which supports the idea that increases in payments from private insurers stem from an underlying increase in the actual prices of services,” said the paper’s third author, Ian McCarthy, PhD, Assistant Professor of Economics at Emory University.

The National Bureau of Economic Research is a place for high impact papers to first appear publicly, with the expectation that the paper will be revised somewhat during peer-review.