Hospital Cost Shifting May Be a Thing of the Past

Convention wisdom has long held that hospitals make up for reimbursement shortfalls in government insurance and uncompensated care by shifting those costs to the privately insured.

Two studies released this month indicate that this may no longer be the case, although they reach different conclusions about how hospitals are coping with the slowdown in Medicare and Medicaid financing.

Rice University economist Vivian Ho and her colleagues looked at revenue by payer at Texas hospitals between 2000 and 2007. They concluded that hospitals have grown revenue by increased use of technology. Ho said she found no evidence that hospitals are shifting costs to private payers to compensate for the fact that they have to deal with the nation’s highest percentage of uninsured patients. She said technology accounted for two-thirds of the growth in prices. She also noted that hospitals are treating sicker patients because lower-acuity cases are being treated more frequently in outpatient settings.

An online study in Health Services Research concluded that nonprofit hospitals cut operating costs to adjust to reduced revenues while for-profit hospitals—that already have lower operating costs—likely will see profits decline.

The HSR study analyzed Medicare cost reports for more than 2,000 hospitals between 1996 and 2009 to examined the effect of changes in Medicare inpatient payments on hospitals’ overall revenues, operating costs, profits, assets, and staffing.

The Affordable Care Act permanently slows the growth of Medicare payment rates for inpatient hospital care. Texas hospitals had to absorb Medicaid cuts of 8 percent and 2 percent in the 2009 and 2011 legislative sessions, respectively.

In 2011, Centers for Medicare and Medicaid Services actuaries predicted that the Medicare cuts would result in 15 percent of hospitals becoming unprofitable within 10 years. They also projected that Medicare rates would be half of the rates paid by commercial insurers by 2040.

However, studies show that Medicare cuts actually result in lower rates paid by private payers. A May Health Affairs study found that a 10 percent Medicare rate reduction was associated with a 7.73 percent reduction in private insurer rates. A study of Florida outpatient surgical hospitals found that Medicare rate cuts resulted in a higher volume of procedures from private payers, which suggests the hospitals lowered their private rates to attract more business to offset the Medicare losses.

“Hospitals’ operations will clearly have to adjust in coming years to a more constrained revenue environment. If hospitals can manage to maintain or improve their quality of care, then the result will be improved efficiency,” the HSR study concluded.

Baylor Health Care System is a case in point. According to a recent market analysis, the system earned more than $600 million on about $3 billion of net patient revenue, or a margin of 17.6 percent in 2011. Yet it cut $100 million in 2011, $150 million in 2012, and plans to reduce expenses by $275 million in 2013 and 2014.

The Ho study also did not find much evidence of hospital market power as a cause for higher prices. In some parts of the U.S., large hospital systems are able to command reimbursement increases well over their increased cost of care because those systems are “must-haves” in insurers’ networks.

As hospitals often point out, the Rice study found that the cost of treating Medicare and Medicaid patients grew faster than reimbursements during the seven-year period. In contrast, the cost of treating privately insured patients grew by about 38 percent but reimbursement grew 53 percent.

Perhaps the most eye-opening finding in the Ho study was that reimbursement for uninsured and self-pay patients exceeded costs for each of the seven years, and reimbursement was higher than that of private-pay patients from 2000 to 2004. The relatively high reimbursements reflected local hospital-district tax revenues that support public hospitals, as well as Medicaid Disproportionate Share Hospital and supplemental Medicaid Upper Payment Limit funds. The ACA gradually will cut both programs.

Texas Hospital Association vice president of advocacy Lance Lunsford reiterated that reimbursement for Medicare, Medicaid, and the state’s workers’ compensation program is less than the cost of care. He said the swell of baby boomers and a stagnant economy are stoking the growth of government insurance programs. He said hospitals consider the payment shortfalls a “cost of doing business that increases year after year.”

Steve Love, president and CEO of the DFW Hospital Council, said the Rice reimbursement figures for the uninsured and self-pay should include bad debt, and the UPL figures should be reallocated to Medicaid revenue. Nonetheless, Love praised Ho’s study for focusing on net revenue figures, rather than chargemaster prices.

Love said the HSR study “went out on a limb” because it is too premature to predict the effect of reduced Medicare payments. His discussions with local hospital CEOs indicate their organizations are figuring out “how to do more with less without sacrificing quality and outcomes.”

Texas, Love said, is getting a “double whammy” because UPL funds are going away because of the expansion of Medicaid managed care and DSH funds will be reduced. However, the state is not expanding Medicaid under the ACA, leaving hospitals responsible for treating the uninsured without what historically were federal subsidies for uncompensated care. He noted the Medicaid 1115 waiver will help recapture some federal funds, but the waiver was not meant to replace UPL funds.

In an interview, Ho urged the government to step up comparative effectiveness research to encourage providers to avoid expensive procedures that do not improve patient outcomes.

She used proton beam therapy as a case in point. Blue Shield of California recently announced it would no longer pay for the therapy for early-stage prostate cancer patients, saying there was no scientific evidence to justify paying $30,000 more for it when other forms of radiation yield similar results.

Ho said Medicare, which does pay for proton beam therapy for those patients, should be more aggressive about not reimbursing care that lacks evidence of improved outcomes.

“Medicare is not allowed to consider costs at all [in coverage decisions,” she said. “That is unacceptable. If there is no improvement in benefit and (procedures) cost more, why not just pay for already-cheaper alternative? It doesn’t make sense to me.”

Steve Jacob is editor-at-large of D Healthcare Daily and author of the book Health Care in 2020: Where Uncertain Reform, Bad Habits, Too Few Doctors and Skyrocketing Costs Are Taking Us. He can be reached at

Posted in Finance, Hospitals, News.
  • Mike Deegan, MD, DM

    Would appreciate a reference for the Ho study cited in this report. Could not find it in the text.

    Thank you

  • Bradford Pearson

    Thanks for noticing that, Mike. I added a link into the story. Thanks for reading.

  • Iraj Roshan, MD, FACC

    “The Ho study also did not find much evidence of hospital market power as a cause for higher prices”. Well, absence of the finding does not support finding the absence. It is a very good study, BUT, if you look at Memorial Hermann in Houston, Baylor system (in Dallas, not Houston) and East Texas Medical Center (ETMC) system in East Texas, you will see how absorption of small hospitals by the bigger fish and enlarement of the networks leads to change in prices &/, subordination of physicians and healthcare providers and a host of authorities to these massive economic powers.

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