Putting Hospitals on a Diet
Shadowfax makes the case for the existence of "cost-shifting" between public programs and private insurers:
[T]he cost of providing health care -- especially for a hospital -- is relatively inelastic on a year-to-year basis. The number of nurses, the payroll costs, the capital expenditures. All of these are not quite fixed costs, but there is very limited ability to make drastic changes in them. Yes, you can decide not to build the $300 million cancer center, or to build a less-opulent version of the cancer center for only $200 million -- there is long-range elasticity in the cost of providing care. But once the buildings are in place, the scanners and equipment are purchased, and the staff is hired, the need to meet this year's operating budget becomes imperative.
Government-funded revenue is completely fixed. It's inelastic. There's no negotiation possible -- the rates are set and providers can take them or leave them. But prices with private payers are negotiable. When you are looking at a budget shortfall, or in the case of physicians, declining physician compensation, and you need more money, there's only one place to go -- to the insurers. It's the only variable source of funding.
Well, that and volume, but we don't want hospitals making up their margins by doing more MRIs. To be clear on my position here, I think there's probably some level of cost-shifting that's between the zero percent that some advocates would like and the 100 percent that the insurance industry suggests. The Lewin Group estimated (pdf) 40 percent, and that sounds reasonable enough to me, though I'd be open to further evidence.
But as Austin Frakt says, the simple fact that public insurers pay less than private insurers is not evidence of cost shifting. It's evidence of a price differential, and the question is how much of that differential represents a shift. Indeed, there are two questions here: The first is how much of the price differential represents cost-shifting. The second is whether hospitals can live on less revenue than they're currently projected to receive. The answer to the first question is probably "some, but not all." The answer to the second is "over time, they're going to have to."
It's true that a hospital's costs are relatively inelastic on a year-to-year basis, but they're more elastic over time: if they had to adjust to less revenue than they'd like, they'd make certain changes to the way they do business. There's some evidence from MedPAC that these changes can mean more efficient hospitals. They can also mean that there will be only one neo-natal unit in town rather than two, or that the building will be renovated five years later than would otherwise be the case, or that there will be longer waits for elective procedures. But whatever it means, hospitals are currently projected to receive enough revenue that the country will go bankrupt, and we're going to have to figure out how to get them to live on less money than that.
Photo credit: AP Photo/Lynne Sladky.
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