Network News

X My Profile
View More Activity

Are Hospitals Extremely Nice to Insurers?

From 2007 to 2009, Keith Hennessey served as the director of Bush's National Economic Council (the same position Larry Summers holds today). Now, he's got an excellent blog, and his skepticism of "cost-shifting" -- the idea that cuts in the prices public programs pay to hospitals leads to rises in the prices private insurers pay to hospitals -- is worth taking seriously:

While doctors and hospital administrators swear by it, I have always been skeptical of the cost-shifting argument. If you believe that a hospital will raise the prices it charges privately insured patients in reaction to cuts in reimbursement rates from government programs, you must believe (1) the hospital has pricing power and (2) it has until now charged less than it could. (1) is quite plausible in some circumstances. I find (2) incredible. If someone has pricing power, I generally believe they will exert it. Are we to believe that providers of medical care were charging privately insured patients less than they could have before the cuts in government payment rates? I am happy to hear arguments on the other side.

Harold Pollack passes along a study (pdf) by the Lewin Group (a consultancy that's actually owned by UnitedHealthCare -- so hardly a source that's unfriendly to insurers) that found cost-shifting is significantly less than the insurance industry claims.

The available research shows that not all of uncompensated care and government payment shortfalls are passed on to private payers as higher charges. … Our own analysis of hospital data indicates that about 40 percent of the increase in hospital payment shortfalls (i.e., revenues minus costs) in public programs were passed on to private payers in the form of the cost-shift during the years studied …”

For comparison, the PriceWaterhouseCoopers study commissioned by AHIP assumed that 100 percent of the cuts in public program reimbursements would be passed onto private insurers. The claim has the curious distinction of being contradicted by both theory, as Hennessey argues, and practice, as the Lewin Group found.

By Ezra Klein  |  October 13, 2009; 11:37 AM ET
Categories:  Health Economics  
Save & Share:  Send E-mail   Facebook   Twitter   Digg   Yahoo Buzz   StumbleUpon   Technorati   Google Buzz   Previous: The Senate Finance Committee Vote: 13-10 or 14-9?
Next: Estimating the Excise Tax


"Our own analysis of hospital data indicates that about 40 percent of the increase in hospital payment shortfalls (i.e., revenues minus costs) in public programs were passed on to private payers in the form of the cost-shift during the years studied"

According to the study, what happened to the other 60% of the increase in hospital payment shortfalls?? Given that overall hospital profits did not decrease during the study period, the payment shortfalls were shifted somewhere. How were the underpayments transferred to paying individuals??

Posted by: rmgregory | October 13, 2009 11:43 AM | Report abuse

Even if there is moderate cost shifting, the private insurance industry is subsidized to a great extent by the very existence of Medicare. Can you imagine what their industry would look like if they were not able to dump all their customers on to a public system at the age of 65? If they had to keep on insuring all those people in their customer base up until their death? If they lose a small amount through cost shifting it doesn't compare to what they gain from the existence of the public, single payer Medicare system for the elderly.

Posted by: evangeline135 | October 13, 2009 11:56 AM | Report abuse

My comment is a little off topic here, but I must say I love what the internet has done for this debate.

I remember 1994, and I think that one of the big problems with how that occurred was the lack of real discussion of issues that took place. Partly that was because of how quickly the plan failed. However, the media available today is fantastic. Then we still relied on radio and television. While today we can read summaries linked to articles, video, and actual documentation. It has been terrific for this movement and will continue to be an asset for democracy.

Thank you for your blog.

Posted by: bcbulger | October 13, 2009 11:56 AM | Report abuse

There's all kinds of ways to make up for lowered payment from Medicare and Medicaid. Because Medicare underpays on Average Cost but not Marginal Cost, you could increase total services, which is one major thing that currently happens with Medicare and Medicaid. You'll also shift some of the extra costs onto the insured population, or the self-pay population.

You could also - gasp - find ways to cut costs and become more efficient, which is what normal businesses do when faced with downward price pressure for their goods and services.

But really, I think hospitals just try to increase volume when faced with prices below average cost but above marginal cost.

Posted by: consid24 | October 13, 2009 11:57 AM | Report abuse

MedPAC had an interesting analysis of this issue in its latest report:

It basically found that when hospital margins from private payers are high, hospital costs go up and margins from public payers drop. What those higher costs buy is another question, but how's THAT for cost shifting?

Posted by: bean3 | October 13, 2009 12:09 PM | Report abuse

it must be great that you can just shove to the side entities like the Lewin Group (OWNED BY UNITED HEALTHCARE) when it suits you and then point to it as a corporate shill when it suits you. How exactly does that thinking work? Do you not realize that this affects your credability as a journalist if you consider yourself one?

As far as your points (1) and (2) you (as much as it pains you) admit to the possibility of (1) but don't believe in (2). The point is that (2) is a figure that is negotiated (in rather tense negotiations over the last decade) and therefore they are not just "set" at a certain figure. If a hospital considers that they can't accept a set dollar amount from a private insurer or face bankruptcy they will simply negotiate themselves out of an insurer network and not accept the influx of patients they get with insurers for a lesser cost. THey then will take the gamble that people will still come to them if they are not in their network. If they lose that gamble, they go bankrupt. If they win they survive for another year. Neither are a great alternative for struggling hospitals.

Posted by: visionbrkr | October 13, 2009 12:21 PM | Report abuse

agree with bcbulger. this is gold baby, GOLD.

And I'm pulling for the FTC to step up and tackle the provider/payer negotiating framework after the dust settles; a framework that is currently very pro-payer.

If AHIP doesn't start playing nice, I'm fairly certain it only takes a swipe of the pen for the administration to allow Independent Practice Associations to negotiate jointly. With the wording of the reform having a strong focus on clinical quality improvement; such focus will bring lots of practices into compliance with what's called 'clinical integration' by the FTC (and therefore be allowed to negotiate for rates as a group).

Also, one of the premises of the cost-shifting argument is flawed in that it presupposes payers pay providers more than the government. They don't. Well, more than Medicaid but not more than Medicare on the whole.

Posted by: ThomasEN | October 13, 2009 12:25 PM | Report abuse

First off, let me say that the PWC report was bogus. Full of faulty assumptions and incomplete analysis.

But this post is pretty funny. Just last week Ezra was denying the existence of cost-sharing, linking to Austin Frakt and his false claims that cost-shifting was a "myth". Now this week he's linking to a study that says 40% of public plan underpayments were shifted to private insurance. So which is it Ezra, is cost shifting a "myth", or do they shift 40% of those losses to private insurance? Anyone credible knows that the PWC assumption of 100% shifting is wrong, but you can't have it both ways. For pete's sake, this was only 6 DAYS ago you were pumping up the argument that cost shifting didn't exist, now you're citing a study that says it's 40%. Make up your mind, show some intellectual honesty here.

Posted by: ab13 | October 13, 2009 12:35 PM | Report abuse

That is an interesting paper bean3. I'm guessing another cause of the profit margin difference between private insurance and Medicare is the utilization management in the private market, no?

Posted by: ThomasEN | October 13, 2009 12:44 PM | Report abuse

Ezra - I think Keith Hennesey's blog is great, but i think he's wrong on this one. I think hospitals have pricing power in certain situations and they exert it when they have it.

If we think of a hospital with 2 customers, the gov't and private sector each making up 50% of revenue. Let's say the hospital needs to generate a 10% return on investment to operate - in other words, if return on investment falls below 10%, the hospital will eventually go out of business. If current return is very close to 10% and gov't payments fall (as they have done relative to the cost of delivering care), then the hospital needs to increase revenue from the private sector or it will go out of business. This is pricing power. The hospital squeezes more revenue out of insurers because their backs are against the wall. This type of pricing power doesn't exist unless the hospital can make a credible threat that it's in dire financial straits. Until it is, it has no pricing power.

Thus, hospitals shift costs to the private sector to remain operational.

Posted by: mbp3 | October 13, 2009 12:52 PM | Report abuse

mbp3, Ezra is admitting that there is cost-shifting, just not on a dollar for dollar basis. I don't think it is a full 100% either, which is why PWC's numbers were silly, but it's nowhere near zero either, which is what Ezra was arguing last week in linking to Austin Frakt's "cost shifting is a myth" post. He is trying to have it both ways.

Posted by: ab13 | October 13, 2009 1:00 PM | Report abuse

ab13, Yes, i see that. My post was more directed towards Hennesey's comments. I think he's wrong on cost-shifting and since Ezra links to him and says his view "is worth taking seriously", i wanted to present an alternative view.

Posted by: mbp3 | October 13, 2009 1:09 PM | Report abuse

yeah, but mbp3, that argument presupposes that it's easier to negotiate a price change with Aetna or United than Medicare and I would argue they are similarly immovable. It's sort of funny they're playing the victim here.

Basically, hospitals find themselves with their backs against the wall and do, indeed, cost-shift, but to the uninsured/self-pay or to anyone rushed in per EMTALA who happens to have a non-participating insurance carrier. Then the billing is a free-for-all (and insurers tried to fight back against this free for all w/the shady ingenix database and lost).

Posted by: ThomasEN | October 13, 2009 1:13 PM | Report abuse


if your argument were fact then Aetna and or United Healthcare (or any private insurer for that matter) would NEVER lose an insurer from their network. We all know that not to be the case. Hospitals leave insurers all the time.

Its incorrect for you to assume that these costs are shifted solely to the uninsured and or self pay. THey do to a point but many of those self pay NEVER PAY, or negotiate when they realize they can a lesser rate. And you need to understand that the "shady Ingeix" as you put it deals with those with private insurance who use out of network benefits. They do not reflect at all on self pay. This is a general misconception of the left on Ingeix. Also the Ingenix "scandal" as the left calls it only applies to out of network services which amounts to 4% of total healthcare services. If you knew about Ingenix it used to be HIAA before it was purchased by Ingenix in the late 90's. What I would propose is that Ingenix be removed from the equation and have a CBO type of unbiased third party take control of these rate calculations so that the liberal red herring is shown for what it is.

Posted by: visionbrkr | October 13, 2009 1:52 PM | Report abuse

Great topic. Hennesey's comments are written from the perspective of theoretical economics rather than business experience.

mbp3 wrote:

"The hospital squeezes more revenue out of insurers because their backs are against the wall. This type of pricing power doesn't exist unless the hospital can make a credible threat that it's in dire financial straits. Until it is, it has no pricing power."

This is dead-on. Insurer-hospital negotiations are high-stakes negotiations for both sides. Hospital need the patients. Insurers need to have sufficient provider coverage in a given geographic area (based on local regulations). The outcomes are binary-- you typically lose access to a hospital system/group of patients or not. Relative market power has a very significant impact on the strength of negotiating power generally. But as mbp3 notes, the dynamic of which side will "blink first" shifts dramatically if hospitals truly have nothing to lose with a "my way or the highway" approach if their overall financial operations are at risk. A considerable number of hospitals are on the borderline of financial ruin at steady state, their margins are very tight, so a cut in public rates frequently puts them in a "no lose" negotiating position with private payers. Payers are then faced with a credible "take these rates or there's no deal" at which point they risk losing the hospital coverage altogether.

Posted by: wisewon | October 13, 2009 2:03 PM | Report abuse

wisewon, that is exactly the scenario I was trying to describe to Ezra and Austin Frakt last week when they were claiming cost-shifting did not exist, but like Hennesey Mr Frakt was relying almost entirely on abstract economic theory instead of real-world experience.

Posted by: ab13 | October 13, 2009 2:24 PM | Report abuse


great points but what I'll add also is that when an insurer loses a hospital they also lose many affilliated doctors with that hospital. that point is almost never mentioned.

Also I find it comical (and SAD) that Senator Rockefeller pointed at the end of his comments that he met with hospital administrators for a dinner recently and had discussions but basically didn't say anything in regards to these facts that we know exist. He said that they basically said "save us from ourselves" but didn't explain his point out. I can't help but wonder why and note that he seems like he really knows nothing about the topics he speaks about when it relates to healthcare. That is something though that I've known for some time now.

Posted by: visionbrkr | October 13, 2009 3:17 PM | Report abuse

"when an insurer loses a hospital they also lose many affilliated doctors with that hospital."

Depends on the physician practice-hospital structure, but you're right-- frequently these groups band together to increase their overall market power and subsequent negotiating power.

Posted by: wisewon | October 13, 2009 3:29 PM | Report abuse


you're correct but what i was inferring was the "hidden providers" within hospitals as it relates to insurance. These are ER doctors, anesthesiologists, radiologists etc. Many insurers cover their members at the 80-90th percentile of UCR when they see these patients at member hospitals and if the hospital leaves that provision goes away and ends up costing the patients more.

Posted by: visionbrkr | October 13, 2009 3:48 PM | Report abuse

There's no doubt cost-shifting exists. It's not a big deal when resources are abundant, and it is a big deal when they're not.

I'd also like to again make the point that the AHIP report is misleading only to the extent that you don't read it carefully. They proper take-home was that proposed Medicare/Medicaid cuts will result in a SMALL (<0.8%) increase in premiums.

Posted by: bmull | October 13, 2009 4:28 PM | Report abuse

Just to set something straight in this discussion, the perception of who are the power players and who are the weak ones in hospital negotiations with insurance companies being endorsed by some of the comments is 180 degrees out of touch with reality.

In the real world, the power to exert pricing control by hospitals is not related to their financial status. It is related to two factors, alone or in combination. First,their market power, which is in turn derived from their market penetration -- if an insurer wants to sell in a community with a system that has 80% of the market, they have to work with that system or go home. Second,their perceived prestige in the market -- institutions like Partners' Group, Mayo, Cleveland Clinic, Sloan-Kettering, and so on simply must be included in the provider list in order to sell coverage in their areas, because people demand access to these "premium" providers.

In fact, small weak systems teetering on the brink of bankruptcy have very little power over insurance companies at all, since insurance companies are not in the business of propping up hospitals except for the few that they have actual financial interests in.

It is the big, successful systems that have the power to hold the insurance companies' feet to the fire and who get the high bonuses for their services -- often as high as 175% to 250% of the Medicare rate. My state's department of health just released a list of private insurance payments for a selection of services from hospitals around the state. The winners -- getting from 50% to 100% more money than others -- were the large systems with high prestige and high market penetration. The little hospitals that are barely getting by are in that position partly because, although they get much the same payments from Medicare and the same payments from Medicaid, they get much less from the private payers.

If you are a hospital that is in financial trouble, the best way to get more out of insurers is to sell yourself to a large and powerful system that can play hardball with the companies.

Posted by: PatS2 | October 13, 2009 8:10 PM | Report abuse


as i've said before I value very much your opinions in here. While I agree with your points in regards to hospitals that have bargaining power and those that don't, I will say that many laws circumvent those guidelines (see my own state of NJ and the example of Bayonne Medicl center). They are widely known as just a horrible hospital that has very very good hospitals in their general area (Hackensack Univ Med Ctr, Jersey City Medical center) but what they've done is (after they went bankrupt and were bought by a private equity firm) left every insurance network and bet that their patients aren't smart enough to know the system and how it works and they're now getting UCR rates as opposed to contracted rates and by example they were getting a per diem rate of $1600 per day and now are getting about 15x that amount in many cases. THey're seeing less patients but getting much more for it. Its the best case scenario for a hospital's bottom line and I'm sure profits are up there this year. The problem is the cost of insurance in NJ is skyrocketing becuase of this and other hospitals circumventing the system that was put in place to protect comsumers. Now this hospital and several others are profiteering from it to the expense of us all. And the good WAPO doesn't get this as they continue stories like the below that demonize insurers who are trying to keep costs in line. How many people's costs will rise to a point of not being able to afford healthcare in NJ for the sake of profits at what many consider a sub-standard hospital??

Are their tactics right, no. But their reason is.

Posted by: visionbrkr | October 13, 2009 8:54 PM | Report abuse

Visionbrkr --

Wow. From what you've said, NJ has many good insurance laws, but they dropped the ball on this one. I can't believe this situation can continue to exist, since everyone clearly loses except the private equity firm. My first guess is they have spread serious money around the state house.

That would be pretty much illegal out here. Plus, for-profits can't own hospitals in this state. Our attorney generals have a long history of interest in health care. If that happened out here there would be legal paper flying.

I think this bizarre situation you report is definitely an outlier. Do you or anyone else know of this happening in other states?

BTW -- yet another situation in which the wapo has failed to go beyond he said/she said journalism and do some real work in finding the facts and reporting them. The entire article does not have one fact that was not obtained from a statement from one side or the other. Some wapo people do good work, but this is typing, not reporting.

Posted by: PatS2 | October 13, 2009 9:56 PM | Report abuse


yes NJ does have many good laws including some good mandates (new one recently covering autism treatment which is scarily prevalent in NJ) but the problem is that this law wasn't in place to protect hospitals, it was to protect consumers and now this hospital is circumventing the law to their benefit. The fear of changing the law is that it could hurt consumers.

There are two things going on now.

1)BCBS is hemmoraging money ($52 million loss in the first five months of 2009) and in turn they're having to raise premiums and we're seeing 20-30% increases. They'll lose market share definitely which is fine by me (they're not that easy to work with anyway). They've also taken the initiative and gotten new plans approved right away by the state of NJ to limit their exposure on this side but people have to purchase those policies and many still have the older ones.

2-groups like NAHU are lobbying trenton to adjust the law so it can't benefit groups like BMC like it is but that is a slow process. I like your idea much better of all hospitals being non profit though.

I'm not aware of this happening elsewhere but as you know that doesn't mean it doesn't. Also Newton Memorial Hospital in NJ also is doing some of the same things from my understanding but they're not getting the publicity of BMC. The great fear is that if others catch on (once they see how profitable it could be for hospials) it could become very prevalent.

Posted by: visionbrkr | October 14, 2009 7:02 AM | Report abuse

The comments to this entry are closed.

RSS Feed
Subscribe to The Post

© 2010 The Washington Post Company