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JAMA Forum
June 24, 2021

COVID-19 Overturned the Theory of Medical Cost Shifting by Hospitals

Author Affiliations
  • 1Robert F. Wagner Graduate School of Public Service, New York University, New York, New York
JAMA Health Forum. 2021;2(6):e212128. doi:10.1001/jamahealthforum.2021.2128

Until quite recently, many health policy observers believed that hospitals engaged in cost shifting. The theory of cost shifting held that, when public payers reduced payments to hospitals or when a hospital saw an increased number of uninsured patients, that hospital would respond by raising the prices it charged to private insurers.

The evidence for cost shifting seemed compelling: the annual report of the American Hospital Association routinely shows the ratios of public and private payments to costs over time, and as the cost shifting theory suggests, as the public ratio falls, the private ratio rises. The actuaries at the Centers for Medicare & Medicaid Services have incorporated the cost shifting story into their projections, hypothesizing that some public payment cuts could be absorbed by hospitals through this behavior. Cost shifting implies that privately insured patients pay part of the cost of care for publicly insured and uninsured patients, implying that the extent of redistribution in the US health system is much greater than tax-based analyses alone would suggest.1

The cost shifting theory persisted for a long time without being examined very rigorously. Data on private insurer payments to hospitals were not available at the transaction level, making such hypothesis testing difficult. The theory also held on because it was convenient. For hospitals, the cost shifting story could be used to argue against any reductions in public payment rates. For progressives, the idea that private patients were already paying for care for the uninsured through higher premiums offered an opportunity to argue that coverage expansions might not raise overall costs for taxpayers much at all. For conservatives, cost shifting implied that the needs of poor individuals were already being met and further reform was not needed. Economists differed2 because it is difficult to come up with a rational economic model of cost shifting, but their objections were drowned in a flood of anecdotes.

In the mid-2000s, data on private payments began to become available. A series of studies by the Medicare Payment Advisory Commission and by academic economists found that hospitals did not cost shift.3,4 On the contrary, when public insurers reduced their payments, private insurance payment levels tended to decline as well.5 The pattern seen in the American Hospital Association’s annual reports could be explained by the effect of private payments on the fixed cost of care. Most of the cost of running a hospital is fixed; equipment, buildings, and much of the staffing of the hospital must be paid for regardless of how many patients the hospital treats. Only a fraction of the cost of hospital care is variable, specific to a particular patient stay. Hospitals determine how much to spend on the costs of production based on the average payment levels they face. As private insurance payments increase, hospitals respond by spending more, often to attract ever-more valuable privately insured patients. If private insurer rates are higher than public insurer rates, private rates will exceed average total costs—the sum of fixed and variable costs—and public rates will fall below average total costs. But that is not cost shifting, it is just the law of averages.

The fixed cost argument punctured the cost shifting theory, but it did not fully eliminate the underlying redistributional premise. Under the fixed cost argument, private insurers are not subsidizing the variable costs of patient care, but they are contributing a much greater share of the fixed costs of hospital operation. The fixed costs story implies that private insurers are paying for hospitals’ marble lobbies, high-tech equipment, and generous staffing, and that publicly insured and uninsured patients—the low payers in those averages—are gaining from the unwitting benevolence of their privately insured peers.

Then came COVID-19. As the waves of the pandemic swept across the country, all hospitals faced extraordinary strains, and their exhausted staffs put in heroic efforts. But even in large metropolitan centers, the pandemic’s toll on hospitals was highly uneven.6 Hospitals that served primarily poor patients were tragically overwhelmed. One reason for the difference was the disparity in the underlying incidence and severity of illness among richer and poorer groups. The other reason, however, was the profound fallacy at the heart of the cost shift hypothesis. Private insurance reimbursement for COVID-19 inpatients—like private reimbursement for all conditions—is 250%7 to 400% as high as public insurance reimbursement.

What does that mean on the ground? Consider New York State hospitals. State discharge data shows that, on average, 27% of patient discharges are paid by private insurers. That average, however, includes Elmhurst Hospital, which was at the epicenter of the pandemic, where only 7% of patients are privately insured, as well as several hospitals where the privately insured fraction exceeds 50% (tabulations of New York State discharge data). Putting those numbers together means that, under conservative assumptions, the average reimbursement at Elmhurst Hospital is about one-third as high as the average reimbursement at a hospital with a high share of private coverage. Although hospitals that serve very poor populations receive some additional public funding (primarily to address uncompensated care), these dedicated funds replace only a fraction of the reimbursement differential. There is little unwitting benevolence at work here.

If those higher reimbursement rates paid only for marble lobbies and fancy equipment, it would not have made much difference to patients with COVID-19. But the extra revenue derived from private patients also provides hospitals with the slack8 that enables them to maintain greater inventories of protective equipment, larger staffs,9 and more flexibility in the use of their assets. Although much further research will be needed to document the effects of funding on COVID-19 outcomes, it would be very surprising10 if funding differences of this magnitude made no difference to outcomes in a crisis.

COVID-19 may be a once-in-a-century pandemic. Investing more resources in acute care hospitals during ordinary times is unlikely to be the most cost-effective way to improve the health of low-income populations. But COVID-19 has washed away the last of the comforting cost shifting myth. It is simply not happening. Much of the time—whether or not it is right—rich and poor patients in the US just do not experience the same inpatient hospital care.

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Article Information

Open Access: This is an open access article distributed under the terms of the CC-BY License. © 2021 Glied S. JAMA Health Forum.

Corresponding Author: Sherry Glied, PhD, MA, Robert F. Wagner Graduate School of Public Service, New York University, 295 Lafayette St, New York, NY 10012 (sherry.glied@nyu.edu).

Conflict of Interest Disclosures: Dr Glied reported receiving grants from the Commonwealth Fund; receiving personal fees from the National Institute for Health Care Management; and being a member of the Geisinger board of directors.

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    1 Comment for this article
    Cost-shifting is Variable, Not Non-existent
    Merrill Goozner, MS | Editor & Publisher, https://GoozNews.substack.com
    Sherry Glied inadvertently proves in her JAMA Forum article of June 24 ("Covid-19 Overturned the Theory of Medical Cost Shifting by Hospitals") that hospital cost shifting is variable, not, as she asserts, that it doesn’t exist. As her description of the varying response to COVID-19 shows, hospitals in better-off areas whose revenue comes predominantly from the higher prices paid by the privately insured “enables them to maintain greater inventories of protective equipment, larger staffs, and more flexibility in the use of their assets.” Hospitals in the areas hardest hit by the pandemic, which depend predominantly on the lower prices paid by public payers, have no such “slack.” On the day her article appeared, over 900 nurses at Cook County’s Stroger Hospital, Chicago’s largest safety net hospital, staged a one-day walk-out over chronic understaffing during the pandemic.(1)

    Researchers who find cost shifting takes place (2) do not claim that all hospital spending is worthwhile nor that there isn’t inefficiency in hospital operations. But the presence of waste doesn’t mean the occasional Medicaid patients who walk through the marble lobby of a well-heeled suburban hospital receives lesser care than their higher paying, privately insured counterparts, which would violate the law. Every hospital in the U.S. has its own mix of privately insured, publicly insured, self-pay and uninsured patients. Continuing to allow hospitals to charge different prices for each payer assures there will be some cost shifting between those different payers.

    Merrill Goozner, MS
    Chicago, IL

    Merrill Goozner is the former editor and columnist for Modern Healthcare.

    (1) https://chicago.suntimes.com/2021/6/24/22548496/cook-county-health-nurses-strike-staffing-stroger-hospital-provident (accessed June 26, 2021).

    (2) RTI International, Evaluation of the Maryland All-Payer Model, November 2019, pg. 236. https://downloads.cms.gov/files/md-allpayer-finalevalrpt.pdf (accessed June 26, 2021).