How much do hospitals cost shift? A review of the evidence.

CONTEXT: Hospital cost shifting--charging private payers more in response to shortfalls in public payments--has long been part of the debate over health care policy. Despite the abundance of theoretical and empirical literature on the subject, it has not been critically reviewed and interpreted since Morrisey did so nearly fifteen years ago. Much has changed since then, in both empirical technique and the health care landscape. This article examines the theoretical and empirical literature on cost shifting since 1996, synthesizes the predominant findings, suggests their implications for the future of health care costs, and puts them in the current policy context. METHODS: The relevant literature was identified by database search. Papers describing policies were considered first, since policy shapes the health care market in which cost shifting may or may not occur. Theoretical works were examined second, as theory provides hypotheses and structure for empirical work. The empirical literature was analyzed last in the context of the policy environment and in light of theoretical implications for appropriate econometric specification. FINDINGS: Most of the analyses and commentary based on descriptive, industry-wide hospital payment-to-cost margins by payer provide a false impression that cost shifting is a large and pervasive phenomenon. More careful theoretical and empirical examinations suggest that cost shifting can and has occurred, but usually at a relatively low rate. Margin changes also are strongly influenced by the evolution of hospital and health plan market structures and changes in underlying costs. CONCLUSIONS: Policymakers should view with a degree of skepticism most hospital and insurance industry claims of inevitable, large-scale cost shifting. Although some cost shifting may result from changes in public payment policy, it is just one of many possible effects. Moreover, changes in the balance of market power between hospitals and health care plans also significantly affect private prices. Since they may increase hospitals' market power, provisions of the new health reform law that may encourage greater provider integration and consolidation should be implemented with caution.

"Quicker and sicker" under Medicare's prospective payment system for hospitals: new evidence on an old issue from a national longitudinal survey.

Medicare's prospective payment system for hospitals (PPS), introduced in the USA in 1983, replaced cost reimbursement with a system of fixed rates which created incentives for hospitals to control costs. Previous studies found that elderly patients were discharged from hospital "quicker and sicker" under PPS and concluded that families were coping at home. We analyse a national longitudinal survey, the first National Health and Nutrition Examination Survey and its Epidemiologic Followup Study, which includes data on more outcomes over a longer period than earlier studies. We find that the rate of admission to nursing homes from the community in the first weeks after a hospital discharge more than tripled under PPS, suggesting that families were not always able to cope. As another response to sicker patients, discharges directly to nursing homes from hospitals, which jumped initially under PPS, may have risen further when payment rates were tightened in the early 1990s. Hospital readmissions fell after the first few years. Our findings are strengthened by the fact that we control for patients' health using health information collected independently of hospital admission.

The origins, development, and passage of Medicare's revolutionary prospective payment system.

This article explains the origins, development, and passage of the single most influential postwar innovation in medical financing: Medicare's prospective payment system (PPS). Inexorably rising medical inflation and deep economic deterioration forced policymakers in the late 1970s to pursue radical reform of Medicare to keep the program from insolvency. Congress and the Reagan administration eventually turned to the one alternative reimbursement system that analysts and academics had studied more than any other and had even tested with apparent success in New Jersey: prospective payment with diagnosis-related groups (DRGs). Rather than simply reimbursing hospitals whatever costs they charged to treat Medicare patients, the new model paid hospitals a predetermined, set rate based on the patient's diagnosis. The most significant change in health policy since Medicare and Medicaid's passage in 1965 went virtually unnoticed by the general public. Nevertheless, the change was nothing short of revolutionary. For the first time, the federal government gained the upper hand in its financial relationship with the hospital industry. Medicare's new prospective payment system with DRGs triggered a shift in the balance of political and economic power between the providers of medical care (hospitals and physicians) and those who paid for it--power that providers had successfully accumulated for more than half a century.

The impact of prospective reimbursement on trauma centers. An alternative payment plan.

We studied 1,526 patients entered into the Trauma Registry by demographic, physiologic, anatomic, investigational, and clinical data. Severely injured patients consumed more resources, had longer hospital stays, and were prospectively reimbursed less than the cost of their hospitalization. Age was not related to severity of injury or cost. The hospital was reimbursed approximately $12,000 less per patient than the cost. A financial projection of reimbursement of trauma patients compared with that of all inpatients revealed that trauma patients were reimbursed less than all patients combined (reimbursement, 77% vs 93%, respectively). Updated reimbursement weighting codes for 1985 increased the losses to the hospital. Trauma patients were reimbursed for 56% of their total bill, a financial loss of $1,800 per patient, and all inpatients were reimbursed 80%, a financial loss of +507 per patient. We suggest an alternative reimbursement system, based on voluntary national norms, objective national outcome criteria, and appropriate trauma management.