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Defining Cost Shifting in Health Administration

What is Cost Shifting in Health Administration? If a young man without a job or health benefits is in an accident and consequently requires emergent surgery, how do we think the hospital offset’s the cost of his medical operation and hospital visit? Is it possible that the older gentleman in the adjacent room who just electively had his Tonsil removed is paying in some way for the young man’s surgery? Does it require two to three other elective surgeries to cover the bill for the accident victim’s care? Some hospitals have a daunting task in keeping their doors open these days for such reasons as stated here. Cost shifting is one way they’ve been able to stay afloat, free from bankruptcy. Cost shifting is the process of sharing expenses among patients. It allows hospitals to stay profitable when low paying patients visit. In cost shifting hospitals shift the loss from low paying or not paying patients to those who can pay and will pay. The concept is similar to that of insurance, where sharing risks and responsibilities are welcomed, except insurance is designed to prevent practices like cost shifting. Therefore, cost shifting is often post the absence of affordability (affordability measured in terms of the presence of health insurance).

Defining cost shifting requires a brief timeline review. Articles dated for the early 1980s discuss the prevalence of cost shifting in healthcare. The graph below shows the timeline of cost shifting on the inequality in payment of private health insurance and the government at the large.

A review of D.R. Cohodes's paper Cost Shifting: A Modern Myth defines cost shifting as the process that hospitals use to attain revenue objectives when they fail to receive full payment of charges from any of their payers; to others, cost shifting specifically describes the rise in prices necessitated by what is, in their opinion, inadequate reimbursement from the federal and state government for Medicare and Medicaid.

Cohodes' paper discusses in-depth how economists think of cost shifting. Price discrimination is a way some health economist might look at cost shifting. This view is more biased to the patient that pays the higher co-pay for health care services; their payment finances the hospital for the unpaid charges of other patients. Another belief of some health economists is that cost shifting is due to reduced payments from patients that are not adequately insured; this view places blame in the hands of patients for a lack of insurance. A third assessment might look into the role of the government in ensuring that all citizens are provided with basic needs including affordable healthcare, therefore affordable insurance; the lack thereof can be blamed on government for not playing its role. All stakeholders of hospital administration and finance, the patient, the insurer, and the hospital have roles to play in the burden cost shifting brings to healthcare.

Michael Morrisey defines cost shifting in his book Cost Shifting in health care: separating evidence from rhetoric in two ways, static cost shifting and dynamic cost shifting. He factors in pricing differences and behaviors as the bases for both definitions. Static cost shifting is simply the existence of price differences for the same service provided. Morrisey gives the examples of a PPO (preferred provider organization) getting charged different prices than small indemnity health insurance companies, and commercial insurers paying hospitals more than the government will for the same services provided to those insured. Static discrimination presents the effect of a collective bargaining power, as Michael Porter’s 5 forces (a business tool used in evaluating the strategic competitive positioning of companies in an industry) presents strength in the power of buyers often due to economies of scale.

Morrisey’s definition of dynamic cost shifting is a stem off his definition of static cost shifting. Morrisey argues that static cost shifting might lead potential payers to pay less once a stronger buying power exists; therefore, the problem with dynamic cost shifting is one of behavior. Dynamic cost shifting is when a provider raises prices for a group of patients because another group is paying less.

A look at the definition of cost shifting as opposed to cost reduction is needed to further describe the issues and effects of cost shifting in the United States’ health care system. A discussion in a recent publication presents that cost shifting rather than cost reduction has been the recent conversation about rescuing healthcare cost in America. For one to attempt pointing out some of the issues with U.S. health care, it is important that the appropriate terminologies are being used for consistency. He points the difference between cost shifting politically and cost reduction to be that “shifting has popular appeal, while reduction requires painful choices.”

The dilemma with cost shifting in America’s health care today is one of real importance. When one looks at the supposed additional expense that the insured pay after contributing their ‘fair-share’ to insurance and co-pay, it can be considered that the payment must be made somehow in some way. In other words, if citizens do not directly distribute responsibilities for the hospital bills of none paying patients, the first would indirectly pay, often in forms of taxes.

God Bless,


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