Cost-shifting is either an economic situation where one individual, group, or government underpays for a service, resulting another individual, group or government overpaying for a service. It can occur where one group pays a smaller share of costs than before, resulting in another group paying a larger share of costs than before. Some commentators on health policy in the United States believe the former currently happens in Medicare and Medicaid as they underpay for services resulting in private insurers overpaying. In 1995, Health Affairs started a study testing the “cost-shifting” theory using a unique new data set that combines MarketScan private claims data with Medicare hospital cost reports, the study ran from 1995-2009. In May 2013 when the findings were released, the study found that a 10 percent reduction in Medicare payment rates led to an estimated reduction in private payment rates of 3 percent or 8 percent, depending on the statistical model used. These payment rate spillovers may reflect an effort by hospitals to rein in their operating costs in the face of lower Medicare payment rates.
Cost shifting in Healthcare
Cost shifting can mean many different things. It can mean a situation where different groups are charged different prices. Or it can mean a situation where a group underpays for some services. But in the end, it is a situation, where the cost does not really equal the service. Some examples of cost shifting are for example; in America the commercial insurers pay the hospitals more than the medicare. Some organisations are even charged less than health insurers.
The problem of cost shifting in health care is based on the fact, that medicare pays hospitals only a fraction of the patient’s costs, which is often significantly lower than the replacement cost. The government says that this gap, is because the compensation is paying only for the costs of the treatment.
Economics of Cost shifting
As we mentioned earlier, the cost shifting is the possibility to set different prices for different groups of customers. There are two important definitions: static cost shifting, that is the ability to charge different prices to different customers. The other one is the dynamic cost shifting, which means charging the maximal amount of money that the customer is able to pay. Imagine the hospitals to have two groups of patients. Those, who are covered by the government. From this group the hospital get fixed cost from the government. On the other hand, the second group of patients are those, who pay for their treatments. Those patients can buy more hospital care at lower price. The hospital that wants to earn as much profit as it can, has to decide whether it will accept patients covered by the government, and how much it should charge to the patients that pay for their treatments. And there we can already see another case of cost shifting. Both groups pay for the same service, but each has to pay different sum. But in competitive market there is rarely any price discrimination, nor cost shifting, because as soon as the hospital would have raised a price to one of those two groups of patients, they would seek care in some other hospital, therefore the hospital would only lose money.
