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Market Concentration Affects Cost-Shifts

Hospitals have been largely thought to shift costs among public and private payers to offset costs. New research reveals that the ability to conduct such cost-shifting is also related to the competitive nature of a hospital’s community.

It is a commonly accepted phenomenon that hospitals are able to afford to care for those patients unable to pay in part because hospitals charge more to those patients who can afford it.  In that same token, many believe that because Medicare reimburses at a lower rate than private insurance companies, hospitals are still able to be profitable overall because they charge more to patients with private insurance as compared to patients with Medicare.  This technique, known as cost-shifting, is blamed by some for the growth in expensive premiums for private health insurance.

Recently, however, the Medicare Payment Advisory Commission (MedPAC) proposed that local market forces for individual hospitals, not cost-shifting, are the cause of high private insurance premiums.  MedPAC suggested that when there are few hospitals in a particular region, each hospital has more bargaining power with each private insurance company. Therefore, hospitals are able to raise reimbursements from insurers.  Initially, the extra revenue helps the hospital to increase services by allowing for more employees, improvements in technology, etc. Soon after, the fixed amount of reimbursement from Medicare becomes relatively lower once the higher value of hospital services translates to higher private payer rates.

An analysis last month demonstrated that both mechanisms described above, cost-shifting and hospital market forces, were at play to keep hospitals financially afloat.  Studying a group of 61 hospitals in eight different states, this analysis calculated the average costs to each hospital for patients undergoing specific procedures and the corresponding reimbursements for those procedures. Private insurer payments were compared to Medicare in both competitive and noncompetitive hospital markets.

The results showed that for the seven surgeries studied, private insurers reimbursed from $6,000 to $21,000 more than Medicare.  In general, private insurers paid much more to hospitals than it actually cost the hospitals to provide for a patient’s particular surgery (range: $9,000-$22,000).  Medicare generally paid hospitals only slightly more than the actual cost of care for that same patient (range: $300-$3,000).  However, when broken down by the competitiveness of the hospital’s market, the difference between the reimbursements was not nearly as large in competitive hospital markets compared to less competitive ones.  In competitive markets, private insurers reimbursed much closer to the actual cost of care.  In non-competitive markets, private insurance permits larger profit margins.

Since Medicare reimburses a flat amount to hospitals for a particular service, one can conclude from these data that the actual cost of providing health care services is less expensive in markets where competition exists.  These data also suggest that hospitals shift and control costs to varying extents based on the competitive nature of their local hospital marketplace.


One contemporary trend in health care is the streamlining of hospitals (and physicians) into subsets of larger groups or systems, thus of care and allowing for economies of scale within the hospital network.  However, innate to this trend is the resultant decrease in competition among hospitals in the same market, which, according to the results of this study, provides an environment in which hospitals may lack the competitive pressure to control costs.  The critical question remains: how can hospitals (and hospital systems) in different markets balance cost containment with quality of care?  Do hospitals that consolidate with their former competitors use their newly discovered market-share to increase coordination of care and improve health outcomes for their surrounding community? Does this mean that this form of quality improvement will prove to have more expensive services?  Or are the hospitals remaining in competitive markets forced to contain costs while also improving quality in order to survive in a more competitive marketplace?  The answer to these questions will likely have large implications for health reform and the (such as Accountable Care Organizations) supported by the Affordable Care Act.

Robinson J. Hospitals respond to medicare payment shortfalls by both shifting costs and cutting them, based on market concentration. Health Aff (Millwood). 2011 Jul; 30(7):1265-71.


Lisa Maurer, MD

Lisa Maurer, MD
About Lisa Maurer, MD

Dr. Maurer is an attending physician with Emergency Medicine Specialists in Milwaukee, WI where she serves as Legislative Liaison. Contact: Facebook | More Posts