Frakt Writes Hospitals Don't Shift Medicare, Medicaid Costs to Private Payers

Contrary to popular opinion, hospitals that receive lower reimbursements from public programs often cut fees to private payers to adjust to the new normal. Medicaid expansion, in particular, has had a net positive effect because hospitals are faced with less uncompensated care.

Austin Frakt, PhD, a health economist with the Department of Veterans’ Affairs, has offered a commentary to dispel a widely held belief: that hospitals charge commercial insurers higher prices to make up for what they lose with Medicare and Medicaid patients. Frakt is a member of the editorial board of The American Journal of Managed Care®.

His essay appears on JAMA Forum, and comes as Republican members of Congress appear poised to use the budget resolution process to unravel the Affordable Care Act (ACA), possibly in the first weeks of President-elect Donald J. Trump’s administration. At this point, however, no viable replacement for the ACA is in sight, and Democrats have vowed to push back.

In this atmosphere, Frakt addresses the gulf between what the public believes and what the evidence shows. In part, he writes, it’s due to statements from payers themselves: he quotes the president of Blue Cross Blue Shield Vermont saying that payers must charge commercial customers higher rates to make up for the “shortfall created by government reimbursements.”

But Frakt asserts that “it’s been nearly 2 decades since any rigorous study has found evidence of substantial cost shifting.” In fact, he writes, the opposite is true—when Medicare and Medicaid cut payments, hospitals cut what they charge private insurers, which peg their reimbursements to the new normal. It makes sense that this happens, Frakt says, because hospitals want to be included in as many networks as possible.

Cost shifting only works if a hospital enjoys enough market power that it knows payers must include it in networks, even if its costs are not aligned with the public programs. He discusses recent work by Kathryn Wagner, PhD, MA, of Marquette on the effects of Medicaid expansion on hospital charges to private payers.

Frakt makes an important distinction. “Even if hospitals do not cost shift, they still cross subsidize. The additional revenue hospitals receive from higher payments from private insurers enable the provision of less profitable services. But this isn’t cost-shifting unless there is a causal, dynamic connection in which private prices rise because of public revenue shortfalls.”

Fears of cost shifting from Medicaid expansion are unfounded, in part because the trend has allowed hospitals to rely less on funds for uncompensated care. Multiple reports that compare the fortunes of safety net hospitals in expansion vs non-expansion states show that some urban hospitals are running in the black for the first time in decades, while many rural states, especially in the Deep South, have seen small hospitals close—uncompensated care funds have dwindled and patients who might have been eligible for Medicaid expansion show up at their doors without any coverage.