Assignment: The Cost Shifting

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Assignment: The Cost Shifting

Assignment: The Cost Shifting

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cost sHIftIng Cost shifting is the practice of transferring costs to some payers to offset losses from other payers. It occurs in every industry, usually to offset losses from bad debt. Evidence of cost shifting in healthcare is based on the fact that different payers pay different prices (charges minus a negotiated discount) for similar services. For instance, in 2015 Medicaid paid an average of 90 percent of the hospital’s costs for caring for Medicaid patients, Medicare paid an average of 88 percent of the hospital’s costs for caring for Medicare patients, while pri- vate payers paid an average of 144 percent of the hospital’s costs for caring for private-pay patients. Employers believe that cost shifting is unfair, and the elimination of cost shifting is the primary reason that large employers favor an “all payer” system where each payer pays the same price for similar services (AHA 2016d).

Recent evidence shows that cost shifting was on the decline in the late 1990s as healthcare organizations lowered their costs in response to the Balanced Budget Act of 1997 and as competition lowered prices to private payers, thus making it more difficult for healthcare organizations to shift large losses to private payers. However, in the first two decades of the twenty-first century, as Medicare margins declined for hospitals, cost shifting increased again, as shown in the most recent years in exhibit 5.8.

Exhibit 5.9 demonstrates the impact of the cost shift in what is described as the cost-shift payment hydraulic for the average hospital. The cost shift is predominantly from Medicare, Medicaid, and uncompensated care (about 47 percent of a hospital’s reimburse- ment) to private health insurance (about 39 percent of a hospital’s reimbursement). Not included in this analysis is other payers (about 14 percent of a hospital’s reimbursement) (CMS 2017b). As payments for Medicare, Medicaid, and uncompensated care decrease below cost, the charges to private payers (including patients not covered by insurance) must increase to avoid a loss to the hospital. The amount of the increase to private payers is a function of not only the below-cost reimbursement the hospital receives from certain payers but also the number of payers available and the amount of operating margin desired by the hospital.

Year Uncompensated Care (in billions)

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