Cost-shifting
Cost-shifting refers to the practice of increasing charges for services provided to one group in order to cover costs incurred by another group. This concept is particularly relevant in the healthcare sector, where it is often associated with the financial dynamics between government-paid health insurance programs, such as Medicare and Medicaid, and private insurance providers. Historically, it has been believed that low reimbursement rates from government programs lead to higher costs for privately insured patients, as healthcare providers seek to recover lost revenue. However, recent economic insights suggest that when government reimbursement rates decline, it may actually lead to a reduction in overall costs for all patients, as hospitals strive to maintain financial viability and efficiency.
Cost-shifting can still occur in specific contexts, particularly in nonprofit hospitals or those in competitive environments, where there may be less incentive for cost efficiency. Additionally, the term also applies to employers transferring rising health insurance costs to employees by increasing co-pays and deductibles while keeping premiums lower. This shift has become more common as healthcare costs continue to rise. Understanding cost-shifting is crucial for grasping the complexities of healthcare financing and its impact on both patients and healthcare providers.
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Cost-shifting
Cost shifting is a term used when an entity increases the amount one person or group pays for a service to cover the cost of similar services paid by others. It is often used in connection with healthcare and health insurance, in which there is a long-standing belief that reduced government reimbursements for Medicare (health insurance for those over age sixty-five) and Medicaid (health insurance for low-income individuals and individuals with disabilities) results in higher medical costs for people who have private insurance. While cost shifting may have been common in the past and can still happen, most economists say the practice has been recognized as counterproductive.
Overview
Hospitals are ethically and legally bound to treat anyone with urgent or emergency health problems. However, patients cannot always pay their co-pays and deductibles for the service. For example, a person goes to the emergency room with a broken wrist on January 1, which results in a bill of $2,500. The patient's insurance includes a co-pay of $100 for emergency room services and also requires the patient to pay a deductible of the first $1,000 of their healthcare expenses. The patient is responsible for $1,100 to have the broken wrist tended; however, they may be unable to pay it. The remainder of the bill goes to the insurance company.
Insurance companies do not generally pay the full amount charged by a healthcare provider. The company may have negotiated a rate of $1,500 for fixing a broken wrist in the emergency room. In that case, the patient still pays $1,100, but the health insurer pays $400.
Reimbursement rates are generally even lower for government-paid insurance, such as Medicare and Medicaid. If the government decides that a broken wrist treated in the emergency room is worth $1,000, that is all the provider will receive, minus any patient contributions.
For many years, health providers and others have said that this practice, in which the government pays far less than the billed cost for a service or reduces the rate it pays for services, leads to providers making up the difference by charging patients with other insurance more.
However, in the early twenty-first century, economists and other experts asserted this was not true and that market dynamics and competition guide hospital pricing. When reimbursement rates go down for individuals insured by the government, it causes a similar reduction in the cost for others. The reason for this, experts posit, is that it is not feasible for hospitals to continue performing services that cost more than they receive in payment. Since it is not practical to implement such changes only for part of their patient population, hospitals drop costs for other patients.
Cost shifting can be an issue in some situations. Some nonprofit hospitals and hospitals in areas with little competition have less reason to become more efficient and may continue to simply shift costs. The term cost shifting is also used to refer to employers shifting the burden for increasing health insurance costs to employees by offering plans with lower premiums for the employer but higher co-pays and deductibles for the employee. This form of cost shifting has increased as health insurance premiums have increased.
Bibliography
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