What Is Cost Shifting in Healthcare?

Cost shifting is an economic concept where the financial burden of services provided to one group is transferred to another. This practice is particularly relevant within the healthcare sector, describing how certain patient groups or payers may end up paying more to subsidize the care of others. The underlying principle involves healthcare providers adjusting their charges to different insurers or patients to manage overall revenue.

Defining Cost Shifting in Healthcare

Cost shifting in healthcare refers to the practice where healthcare providers, such as hospitals and clinics, increase charges for services to certain patients to cover shortfalls incurred from other patient groups. This primarily involves raising prices for privately insured patients or those paying out-of-pocket. The goal is to offset lower reimbursement rates from government-funded programs like Medicare and Medicaid, or to account for uncompensated care provided to uninsured individuals.

The core of this “shifting” involves a strategic adjustment of pricing across various payer categories. For instance, if Medicare or Medicaid reimburses a hospital less than the actual cost of a procedure, the hospital might then charge a private insurer a higher amount for the same service. This higher charge aims to recover the difference and maintain the provider’s financial viability. This practice is sometimes referred to as “dynamic cost shifting,” implying a causal link where a reduction in payments from one payer leads to an increase in charges for another. The concept suggests that the financial deficit from one patient population is directly absorbed by another, redistributing the overall cost of healthcare services.

Root Causes of Cost Shifting

The primary factors driving cost shifting in healthcare stem from economic pressures and policy structures. A significant contributor is the reimbursement rates set by government programs, specifically Medicare and Medicaid. These programs often pay healthcare providers less than the actual cost of delivering services, creating a financial gap for hospitals and other facilities. For example, Medicaid reimbursement rates generally average around 78% of Medicare rates, though this varies considerably by state and procedure.

Another substantial cause is the prevalence of uncompensated care, which includes both charity care and bad debt from patients who cannot pay for services received. Hospitals are legally obligated to provide emergency care under the Emergency Medical Treatment and Labor Act (EMTALA), regardless of a patient’s ability to pay. The costs associated with this uncompensated care must be absorbed by the healthcare system.

Healthcare providers face constant financial pressure to cover their overhead, operational expenses, and invest in new technologies and staff. When government reimbursements do not adequately cover the cost of care, and a substantial portion of care goes uncompensated, providers must find alternative revenue streams. This often leads to increasing charges to payers with greater ability to pay, such as private health insurance companies, to offset these deficits and maintain profitability.

How Cost Shifting Affects Different Groups

Cost shifting in healthcare has tangible impacts across various stakeholders within the system.

Privately Insured Patients

Privately insured patients often bear a significant portion of this shifted burden. They may experience higher health insurance premiums, increased deductibles, larger co-pays, and greater out-of-pocket costs for medical services. For instance, the average deductible for a single coverage plan nearly doubled from $1,025 in 2010 to $2,004 in 2021, reflecting a broader trend of shifting costs to individuals.

Employers

Employers, who frequently provide health insurance benefits to their employees, also feel the effects. As healthcare providers raise charges to private insurers, these increased costs are passed on to employers through higher premiums for employee health plans. While employers may try to absorb some of these increases, they often respond by offering plans with higher deductibles or co-pays, or by requiring employees to contribute a larger share of the premium. For example, the average annual premium cost for employer-sponsored family coverage reached $25,572 in 2024, with employees covering an average of $6,296.

Healthcare Providers

Healthcare providers manage their revenue by strategically adjusting charges across different payer groups. They may negotiate higher rates with private insurers to compensate for the lower, often fixed, reimbursement rates from government programs. This adjustment is a complex balancing act, as providers must ensure financial viability while remaining competitive and accessible to all patients.

Uninsured Patients

Uninsured patients contribute to the cycle of cost shifting by generating uncompensated care. When uninsured individuals receive medical services, particularly emergency care, and cannot pay, these costs become a financial strain on healthcare providers. While not directly paying higher prices themselves, their care indirectly contributes to the financial pressures that lead providers to seek higher reimbursements from other payers. This dynamic underscores the interconnectedness of healthcare financing across all patient populations.

Perspectives on Cost Shifting

The concept of cost shifting in healthcare is a subject of ongoing debate among economists, policymakers, and healthcare researchers. Many healthcare providers and industry analysts assert that cost shifting is a widespread and quantifiable phenomenon, arguing that lower government reimbursement rates directly lead to higher prices for privately insured patients. They contend that without the ability to shift these costs, hospitals and other facilities would face severe financial instability, potentially impacting access to care.

Economists, however, often present a more nuanced view, questioning the extent and even the pervasive existence of cost shifting as a direct causal relationship. Some argue that if hospitals already maximize their prices based on market power, there would be limited opportunity to simply raise prices further in response to government underpayments. Instead, they suggest that factors like hospital consolidation and market power play a more significant role in determining private insurance prices.

Research has yielded mixed evidence on the direct correlation between reductions in public payments and increases in private prices. While some studies have found evidence of cost shifting, particularly in hospitals with a larger share of private insurance patients, others suggest that hospitals are more likely to reduce costs or increase efficiency in response to lower public payments rather than solely raising prices for private payers. For instance, one study found that between 2010 and 2015, hospitals reacted to reduced Medicare payments by negotiating an average of 1.6% higher payments from private insurers.

The debate also touches on the implications for policy. If cost shifting is not substantial, then changes in public payment policies might not significantly affect private insurance premiums. Conversely, if it is a significant factor, then adjustments to government reimbursement rates could have broad impacts on the entire healthcare economy. Understanding these differing perspectives is essential for developing informed policies that balance affordability, access, and the financial health of healthcare providers.