Book Review

Cost Shifting in Health Care: Separating evidence from rhetoric

N Engl J Med 1995; 332:1313May 11, 1995

Article

Cost Shifting in Health Care: Separating evidence from rhetoric
By Michael A. Morrisey. 89 pp. Washington, D.C., AEI Press, 1994. $19.95. ISBN: 0-8447-3860-3

Michael Morrisey presents a lucid evaluation of cost shifting, especially in hospital and physician markets, within a classic microeconomic framework. He tackles three fundamental questions: Do providers engage in price discrimination among payers (static cost shifting)? Are differences in price a reflection of differences in the cost of providing health services? And most important, do providers charge higher prices to some consumers because of lower prices charged to other payers, such as Medicare or Medicaid beneficiaries (dynamic cost shifting)?

The book proceeds logically from a clear presentation of relevant microeconomic theory to a review of dynamic cost shifting in hospital and physician markets and finally to a discussion of policy implications and conclusions. Unfortunately, the paucity of published articles hampers an analysis of the empirical literature, which consists of four studies of hospitals, three of which predate the Medicare prospective payment system, and only one study of physicians. This meager literature suggests that there is limited evidence of cost shifting in hospital and physician markets and that this claim is not justified on the basis of differences in the average cost of providing care. Furthermore, dynamic cost shifting does not completely counterbalance losses associated with charging one group less than another. Morrisey argues that any dynamic cost shifting that may have occurred in the past has been limited, in part, because of increased price competition in the hospital market during the past decade, and is not an important phenomenon in much of the hospital market today. He concludes that “a greater reliance on price competition in hospitals and in other health care areas, in general, may yield substantial benefits.”

Since so little research has been conducted on cost shifting in hospital and physician markets, the reasonableness of conclusions and policy implications must be based primarily on the application of economic theory to the behavior of corporate or individual participants. At times, assumptions such as rationality collide head-on with other determinants of behavior, such as equity or distributive justice. For example, in responding to the public statement that not all payers pay their fair share of the costs, Morrisey writes, “It may seem unfair to some, but it is how competitive markets work things out.” Many would disagree, as the author points out.

The most irresistible feature of Morrisey's book is his informed reply to public statements and perceptions about cost shifting and the policy implications of this rhetoric. He provides an insightful and germane illustration in chapter 8 with a brief presentation of the case for government insurance for uninsured Americans. The public argument is that the provision of health care benefits to the uninsured would result in lower prices for those currently insured by private indemnity plans, since hospitals would no longer need to support the uninsured. Morrisey suggests, however, that hospitals no longer required to provide free care for the poor and uninsured would instead spend their money elsewhere and continue to charge the same prices to their privately insured patients. Furthermore, since currently uninsured patients would compete for care with privately indemnified patients, transaction prices would increase, according to microeconomic theory. Whether or not this kind of scenario occurs, Morrisey's work obliges us to reflect on the range of possible outcomes of the health care initiatives we undertake. Unfortunately, changes in health policy too often result in unexpected and adverse outcomes, such as the increased use of expensive hospitalization and other services after the implementation of a restrictive pharmaceutical policy that was supposed to save state Medicaid funds. This thoughtful book provides us with insights and one method for examining pressing economic issues, such as differential costs and prices in hospital and physician markets.

Thomas McLaughlin, Sc.D.
Harvard Medical School, Boston, MA 02115