Question

a. Suppose that Generic General Hospital (GGH) has no market power in price negotiations with private insurers (i.e. suppose GGH is a price-taker, facing perfectly elastic demand for its services). Briefly explain why a reduction in public payer rates could not generate “cost-shifting” in this situation.

B. Suppose that Magnificent General Hospital (MGH) has market power in price negotiations with private insurers, and exploits its market power to the best of its ability (i.e. it is able to set a revenue or profit-maximizing price). Briefly explain why a reduction in public payer rates could not generate “cost-shifting” in this situation.

Answer 1

Cost shifting means it occurs when a hospital or other health -care provider charges an insured patient more than it does an uninsured patient for the same procedure or service. Those with health insurance ,in effect, pay for the financial loss hospitals incur when the provide services to those without insurance .In perfectly elastic demand seller is a price taker not a price maker, so they could not restrict the price or market price and market condition.So they give health care reform has emerged as a serious priority at both the national and state levels.The primary goals of most reform efforts are to improve access to health care services while also controlling total health care expenditure and assuring quality of care. One option for reform would give government the sole authority to pay providers.Such an arrangement known as Single payer system,is exemplified by the Canadian health care system .Proponents argue that a single payer system would assure equal access to care for all citizens,and that it would be more successful in controlling cost.Cost control might be easier not only as a result of the reduced administrative costs and possible economies of scale ,but also because of the governments exclusive bargaining power.

In the case of profit maximizing Seller is a price maker not a price taker, So they decide how to sell a product in a higher profit rate and how to increase the profit of a firm.So they control the market price .In this both medicare and medicaid are reducing payments to hospitals , and there is widespread concern that  hospitals may respond by increasing prices to privately insured patients. Theoretical models of hospital behavior have ambiguous predictions as to whether and under what circumstances ,hospitals will shift costs to private payers. Hospitals did increase their prices to private payers in response to reductions in Medicare rates, they had far smaller and generally insignificant response to changes in Medicaid reimbursement .Hospital ownership and the competitiveness of the hospital market both affected this behavior , but there was no significant change over time .The result suggest the nee broaden our models of hospital behavior to "embed"them in their local markets.