Is The Pervasive Theory of Cost Shifting Largely a Myth? Cost Shifting and Price Discrimination Explained

One of the most widely held beliefs in healthcare is that when the government cuts Medicare or Medicaid reimbursements those costs are simply shifted over to private insurers (born primarily by employers and employees) in the form of higher costs.  

The fascinating reality is that the theory of cost shifting is largely myth.  The best studies from well known economists are showing that for every dollar that Medicare drops reimbursement, only about 20 cents are shifted to the private insurance market.  

I've linked one summar of such a study here.  And you navigate up to the "cost shifting" tag cloud in the upper right section of this link you can see a myriad of data debunking the myths that cost shifting moves as much as 50 to 80 cents on the dollar.   

A 20% shift is not chump-change as one of the commenters points out, but it also means 80% of real savings.  This will then lead into a discussion about whether providers are paid too much - which can be hotly debated all on its own.   

What many folks may think of as "cost shifting" is really the economic principal of price discrimination, which does occur regularly in healthcare and other markets.  Austin Frankt describes this nicely here:

It is well-known that hospitals charge different payers (health plans and government programs) different amounts for the same service even at the same point in time, a phenomenon known to economists as “price discrimination” (Reinhardt 2006). Price discrimination is not unusual. Airlines engage in it (charging passengers on the same flight different ticket prices depending on purchase date), as do hotels (different room rates by date of purchase), colleges (via financial aid), movie theaters (senior and child discounts), and many other industries. ... 

However, price discrimination does not mean that someone pays more because someoneelse paid less. In fact, a business that was trying to earn as much profit as it could should charge each customer as much as it can without driving too many of them to a competitor. In other words, the price you pay at the movies is the profit maximizing price. Even if another class of customer (senior citizens or kids) pays less, the profit maximizing price for you is not higher because they do so. In fact, if the theater lowered its price for senior citizens further and raised those for younger adults, it would drive away the younger ticket purchasers and attract more senior citizens, lowering profit, not raising it.

However, for some reason when it comes to health care–and in particular, hospital service–it is widely believed that private insurers have to pay more because public programs pay less. This phenomenon is called “cost shifting” (Morrisey 1993, 1994, 1996, Ginsburg 2003).