Hospital pricing: cost shifting and competition

Area of Science:

• Health Economics
• Healthcare Policy
• Hospital Management

Background:

• Cost shifting, where hospitals raise prices for some payers to cover undercompensated care, has significant policy implications.
• Unsponsored and undercompensated hospital costs reached an estimated $21.5 billion in 1991.
• Empirical evidence on hospitals' ability to fully adjust prices for cost shifting is mixed.

Purpose of the Study:

• To examine the extent and limitations of cost shifting in the hospital industry.
• To analyze how market dynamics and competition affect hospitals' pricing strategies.
• To assess the implications of cost shifting for healthcare access, particularly for the uninsured.

Main Methods:

• Review of health services research literature on hospital pricing and payer negotiations.
• Analysis of market factors, including hospital competition and buyer power (e.g., PPO, HMO).
• Examination of the relationship between hospital market power and the ability to implement cost shifting.

Main Results:

• Hospitals' ability to shift costs is constrained by market power and buyer sensitivity to price.
• Eroding hospital market power, particularly in competitive or price-sensitive markets, limits cost shifting.
• In less competitive markets, higher private payer prices may partially offset reductions from Medicaid/Medicare and uncompensated care.

Conclusions:

• Cost shifting is increasingly difficult due to changes in hospital and insurer competition.
• A market-based approach to hospital pricing necessitates a clear policy for the uninsured.
• Without explicit consideration for the uninsured, increased healthcare competition may reduce their access to care.