Public Payment Rates For Hospitals And The Potential For Consolidation-Induced Cost Shifting

Abstract

The theory of hospital cost shifting posits that reductions in public prices lead to higher commercial prices. The cost-shifting narrative and the empirical strategies used to evaluate it typically assume no connection between public prices and the number of hospitals operating in the market (market structure). We raise the possibility of “consolidation-induced cost shifting,” which recognizes that changes in public prices for hospital care can affect market structure and, through that mechanism, affect commercial prices. We investigated the first leg of that argument: that public payment may affect hospital market structure. After controlling for many confounders, we found that hospitals with a higher share of Medicare patients had lower and more rapidly declining profits and an increased likelihood of closure or acquisition compared with hospitals that were less reliant on Medicare. This is consistent with the existence of consolidation-induced cost shifting and implies that reductions in public prices must be undertaken cautiously. Mechanisms to limit closure- or acquisition-induced increases in commercial hospital prices may be important.