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Working Paper Identifies Hospital Cost Shifting Resulting From Medicare Penalties


A new National Bureau of Economic Research working paper identified potential hospital cost shifting and that hospitals penalized by the Hospital Readmission Reduction Program and the Hospital Value-Based Purchasing Program actually had an increase in average payments of 1.5%.

Whether or not hospitals shift costs, by increasing prices with private insurers in response to reductions in public funding has been an ongoing debate in healthcare for a few decades. A new National Bureau of Economic Research working paper has found a modest degree of cost shifting is occurring.

The researchers used 2 components of the Affordable Care Act—the Hospital Readmission Reduction Program (HRRP) and the Hospital Value-Based Purchasing Program (HVBP)—to estimate net public payment reduction. HRRP penalized hospitals with 30-day readmissions exceeding a certain threshold by reducing Medicare payments and HVBP reduced Medicare payments to all hospitals but incentivized them to provide quality care with payments.

The research on cost shifting has been inconclusive: while there has been some research to support the idea of cost shifting, other research has concluded that cost shifting is not widespread.

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,” the authors explained.

Using data on actual payments from private insurers to hospitals as well as HRRP/HVBP penalties, the authors found that hospitals penalized by HRRP and HVBP actually had an increase in average payments of 1.5%, for a total increase in private payments of $82,000 per hospital.

The results showed that hospitals shifted prices so that private payers were charged equivalent to 56 cents more for every $1 decrease in public payments. What wasn’t clear was how hospitals receiving penalties for low quality care were able to negotiate a higher payment from private insurers. The authors came up with 3 potential explanations:

  1. The quality information revealed by the penalty is not new information
  2. Hospitals exploit the penalty in other areas not tied to quality where they have an advantage
  3. Hospitals have sufficient bargaining power regardless of the negative quality score

The authors found little evidence that hospitals were increasing treatment intensity based on the construction of a set of indicators for “profitable” versus “unprofitable” services. They determined that hospitals were not shifting toward more profitable services or treating patients more intensively as a result of being hit with HRRP/HVBP penalties.

“Indirectly, the results therefore support the hypothesis that our estimated increase in payments derives from some underlying increase in actual prices,” the authors concluded.

Among the responses to the study was a piece from health economist Austin Frakt, PhD, an editorial board member of The American Journal of Managed Care®, who wrote for the Incidental Economist that he was skeptical about the findings. Frakt has written previously that healthcare cost shifting is a “myth.” However, he did note an important limitation that could make it difficult to identify what is happening as costs shift. He wrote that hospitals could have responded to penalties by changing their costs and the value that they provide, which can affect prices.

“That’s not cost shifting,” he said. “Not being able to control for that in a cost shifting study is a big problem.”

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