Question

The theory of cost shifting is often used as the basis for public policy proposals. Some believe that the increase in increase premiums is due to cost shifting. This will be the topic of this week’s paper. Briefly discuss what cost-shifting is. Discuss the 4 points associated with determining the profit-maximizing price. Why do private purchasers claim that they are being charged more to make up for lower prices paid by the government? What are some of the conditions under which cost shifting can occur? Based on your research, do you feel that cost-shifting is occurring?

Answer 1

This post does stand on its possess, nevertheless. In it I'll discuss a idea of hospitals underneath which cost transferring can arise, though conception alone can't inform us the fee shift price. Keep in mind that thought does now not replicate the entire richness of reality. It's intended to present us some instinct in regards to the world whilst keeping off the insurmountable challenges in precisely representing it.

All figures and prices beneath are from David Cutler's 1998 paper cost transferring or price reducing: the incidence of discounts in Medicare repayments. As far as i know, it's the one paper on fee shifting that presents a graphical theoretical treatment under utility (not profit) maximization.

Imagine a clinic that uses anything profits it chooses to generate to subsidize unprofitable movements, corresponding to take care of the uninsured, instructing, research, or other investments. The medical institution goal is not to maximize earnings, however to maximize some thing else, generically termed utility. A perform that characterizes utility can comprise revenue, of path, however it must also include other hobbies unprofitable stuff too.

Bear in mind the following figure for which fee (on the horizontal axis) is the fee paid by personal (non-govt) payers, assumed to be steady for all such entities for simplicity. Services (on the vertical axis) can be a one-dimensional abstraction of the kind of types and quantities of offerings hospitals furnish.

Focal point first on the revenue operate, ignoring for now the indifference curve. At one severe, on the left half of the profit curve, the clinic is not supplying some offerings that might earn it higher revenue. As services supplied develop, so does revenue, as much as a factor. On the correct 1/2 of the curve, the hospital is offering offerings that cost it more than the revenue it receives for them, lowering profit.

It is on the whole agreed that profit-maximizing organizations will set cost equal to Pmax, with the profits going to the health centers homeowners. But most hospitals aren't for revenue. Consequently, the objective operate of the sanatorium shouldn't be as unique. I count on that the health facility values both scale back prices to exclusive payers and extra of the other hobbies.

The equilibrium is for the hospital to prefer point E, where it earns some profits from privately insured patients however does not charge the profit-maximizing fee.

Point E is simultaneously on the profit perform and the indifference curve. The latter traces out the set of provider-price pairs for which the medical institution is equally content material to provide: they have equal utility (which the health center seeks to maximize). Aspects on the indifference curve are consistent with the truth that the clinic is willing to give up provision of some offerings (which comprise unprofitable activities) if it may possibly cost prices which might be sufficiently low (for the reason that it also views reduce prices as a type of charity). Factor E maximizes utility inside the possible set of service-rate pairs.

The result of a discount in Medicare repayments is shown within the figure immediately below.

[It] may also be represented as a shift down of the profit curve. The utility maximizing medical institution will each cut back its charity care to exclusive patients (that is, increase the costs it bills them) and cut back its profits. With the overall utility operate, both of those responses would occur. The outcomes of Medicare cost discounts on growing prices to exclusive patients is termed cost shifting. The result of cost rate reductions on lowered profits, and as a consequence the ability of the health facility to pursue its different missions, is termed rate reducing.

How so much of the reduction in Medicare repayments will show up as rate reducing and the way a lot as price shifting? Idea can't inform us, but it may disclose the foremost standards.

The potential to rate-shift is dependent upon having a residual private sector where demand for sanatorium care is relatively inelastic. Recent [circa 1998] alterations in the hospital therapy market in detailed the upward thrust of managed care have possible converted the demand elasticity. Whilst managed care has many results on the hospital therapy process, the essential outcomes for this analysis is that it makes patients more aware of cost raises at detailed hospitals.

If sufferers (or the plans that symbolize them) are extra attentive to fee, hospitals have much less capacity to shift costs. That is proven within the subsequent determine wherein

[t]he profit schedule each has a lower height (in view that maximum earnings are smaller) and is flatter (seeing that the identical broaden in rate will outcome in a smaller develop in profits). Medicare cuts in this market will outcome in more fee slicing and not more cost moving than Medicare cuts in the market with less elastic demand. The intent for that is that the expanded demand elasticity raises the [utility] loss to the hospital of shifting a buck of expenditures relative to the [utility] loss to the clinic from having cut back profits. Indeed, as managed care spreads and the health facility extracts all the revenues viable from private insurers, the whole amount of Medicare discount will influence in cost slicing. Rate moving should be less accepted in markets the place managed care is extra predominant.

This is the primary factor. For hospitals that don't maximize profit, cost shifting can occur, but nonetheless may not be a massive phenomenon. It is dependent upon the capability of personal consumers to withstand rate increases, i.E., their market clout or fee elasticity. Actually, as soon as a health center has exercised something market energy it possesses its capability to develop confidential prices with out harming profit from that sector there is no further scope for fee shifting. If a health center, having reached that factor, persisted to cost shift it would slash its drift of assets it seeks to use for its non-revenue features. Even charity care requires resources and theres a highest exclusive fee beyond which these resources start to lower.