Payment Policy : Does Cost Shifting Matter ?

We examine cost shifting within the context of Medicare payment policy. We briefly review economic theory and available data and discuss the importance of cost shifting for policy. Then we present four central findings on cost shifting based on the views of former high-level policymakers. First, Medicare’s early (pre-prospective) payment policy was a boon to hospitals. Second, Medicare payment policy is a “top-down” affair, driven by budgetary and special-interest politics. Third, federal policymakers may not consciously consider cost shifting, but state policymakers do. Fourth, Medicare payment policy requires constant adjustment, but we are “getting it right” most of the time. F or at least th irty years there has been no agreement on whether the federal government should develop health care payment policies that address only the costs of public programs, especially Medicare and Medicaid, or whether such policies should broadly address inflationary cost pressures across the health care system. In the early 1970s the Nixon administration placed wage and price controls on the entire economy but kept controls on health care services even after the controls on other sectors of the economy had been withdrawn. A central premise of the Carter administration’s hospital cost containment legislation was that cost controls had to be applied to all payers. Indeed, a major reason for its defeat in Congress was the all-payer approach. In enacting the inpatient hospital prospective payment system (PPS) for Medicare in 1983, the Reagan administration and Congress went in the other direction, applying a Medicare-specific cost containment strategy for hospital spending. In subsequent years such approaches were adopted for physician services and for most other provider types.1 A central question raised in evaluating Medicare payment policies is who actually bears the burden of payment reductions: providers alone, whose reimbursement rates are directly reduced, or payers as well, particularly private employers who sponsor health insurance for their employees. In general, do providers “shift costs”—that is, raise prices to one set of payers in response to lower prices from another? And, in the case of Medicare, do hospitals and physicians respond to federally initiated payment reductions by shifting costs to H e a l t h T r a c k i n g W 3 4 8 0 8 O c t o b e r 2 0 0 3 DOI 10.1377/hlthaff.W3.480 ©2003 Project HOPE–The People-to-People Health Foundation, Inc. Jason Lee ([email protected])is principal senior adviser at the National Organization for Research at Chicago (NORC) in Washington, D.C., and president of Health Policy Consulting LLC in Bethesda, Maryland. Bob Berenson is senior fellow at the Urban Institute in Washington. Rick Mayes is an assistant professor of public policy at the University of Richmond (Virginia) Department of Political Science. Anne Gauthier is a vice-president at AcademyHealth in Washington, D.C. on S etem er 8, 2017 by H W T am H ealth A fairs by http://conealthaffairs.org/ D ow nladed fom private payers? Do those who make Medicare payment policy care? In this paper we summarize the debate on cost shifting, which economic theory says should not happen but empirical data do not rule out. To illustrate the latter point, we then focus on payment trends for hospitals, a major stakeholder in cost-shifting dynamics.2 We do not attempt to resolve the debate empirically. Instead, we reflect on cost shifting from a policy perspective by drawing on the expert opinion of former high-ranking public officials.3 We show that the debate on cost shifting is part of a much broader policy discussion about administered pricing and the role of government in setting health care payment rates. The Medicare program is our central focus. We emphasize four central findings that inform current discussions about cost shifting and Medicare payment policy.