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. But this is not third-degree
price discrimination because it relies on high
market power that comes from the two shaping properties of the segmented markets. During discrimination, each segment of the market is offered a price so that the amount of
surplus received from each customer group is at its highest level and none of the market segments is unprofitable to a predominantly
monopoly producer while
cost-shifting is a solution to compensate for one group's lack of payment through another. in other words, underpayment of public programs in healthcare like
Medicare and
Medicaid is rectified by higher corresponding prices for private payers somehow the private payment to cost ratio is significantly and negatively correlated with that of public programs. However cost-shifting need not be dollar per dollar, as hospitals can absorb some degree of cost-shifting pressure through increased efficiency and decreases in service provision.
Types There are two important types:
static cost-shifting (price discrimination), 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 (not necessarily the highest possible value, but the value that people are still willing to pay for the service). Although there are some pieces of evidence that prove hospitals practice this procedure but their ability to shift costs dynamically decreases over time. For example, the hospitals may have two groups of patients. There are those who are covered by the government. From this group the hospital get fixed costs 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 a 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 (lower income for hospital), and how much it should charge to the patients that pay for their treatments. This is another case of cost-shifting. Both groups pay for the same service (hospital), but each has to pay different sum. But in a 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.
Problems of cost-shifting in healthcare 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 US government says that this gap (the cost gap between the patient’s real cost and the compensation), is because the compensation is paying only for the costs of the treatment (meaning, it pays the doctors and hospital for the expenses).
Overview Cost-shifting has been discussed for a long time. It is still assumed to be one of controversial topics in USA healthcare politics. There are studies, which try to clarify why and where in the system this phenomenon originates. Researchers try to provide facts and studies by state insurance programs
Medicare and
Medicaid. Because of multiple insurance system and other factors (such as deals between insurers and hospitals and so on), a subsidy system which supports the healthcare in the USA. On one side are sited regular insurance payers who could subsidize healthcare for the other insured patience. On the other are people, who are state insured because they cannot afford any other kind of insurance. Cost-shifting is caused by some reasons mentioned in following paragraphs.
Cost-cutting as a cause of cost-shifting Cost-shifting is a situation where one group of payers overpays costs for a good or a service for another group, which in total pays less than the first one. This problem originates in hospitals. They need to pay for treatment and staff performing it. Hospitals need to balance their costs and incomes. Problem begins in communication between hospitals and insurers, who want to save as much money as possible. Therefore, hospitals cannot charge their patients higher prices. If they did, it could lead to terminating a contract between hospital and insurer and moving a patient into a different hospital. Further there are public programs such as Medicare and Medicate, which are limited by law. Main reason is that revenue from state insured patients is lower than from private insured patients. A negotiable pricing regime has resulted in an opaque system in which payers with market power force weaker payers to cover disproportionate shares of providers’ fixed costs or providers simply succeed in charging higher prices when they can. However, some evidence suggests that hospital markets with relatively slow growth in Medicare inpatient hospital payment rates also had relatively slow growth in private hospital payment rates during 1995-2009. Using regression analyses, It is 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, a result that somehow contradicts the cost-shifting. It means cost-shifting is not a common occurrence and can only persist in a market in which private payers are not price-sensitive, and entry is limited. Under these conditions, the hospital can sometimes afford not to profit maximize, a prerequisite for cost-shifting. nevertheless, the shift of costs by a provider is not a solid concept that has a status of zero and one but has a degree of applicability which means in markets the cost-shifting will be the largest if in which a hospital has the greatest relative market power. This means it will happen if the market power of a hospital in the provider side is larger relative to the market power of any given insurer or support program in the insurance side. ==References==