Hospital pricing and organizational control: The effect of government payment changes on hospital prices
It is commonly believed that hospitals are able to maintain their financial health by responding to decreases in government payments with increases in private prices, a practice known as "cost-shifting." However, it has been pointed out previously by economists that this behavior is inconsistent with profit maximization. Previous studies intended to confirm or deny this behavior have had important limitations and conflicting results. This study addresses the question of whether reductions in government payments to hospitals cause increases in private prices, and under what circumstances. A model is posited in which nonprofit hospitals have utility for profits, but disutility for high private prices stemming from the Board of Trustees' role as representatives of the community. This model predicts that hospitals will price at less than the profit maximizing level when government prices are high, but will raise prices in response to government price decreases (that is, cost shift), and will continue to do so until the profit-maximizing price is reached. This model is tested with four samples of differenced data, primarily from the AHA Annual Surveys, spanning 1980-1991, in a cross section of differences approach. The null hypothesis that government price decreases do not cause increases in private prices for nonprofit hospitals was rejected at high confidence levels. A key related and reinforcing finding of high statistical significance is that investor-owned hospitals were found to lower, rather than raise, their prices in response to government price decreases, consistent with a model of pure profit-maximization. These findings are consistent with the predictions of the model posited for nonprofit pricing, and indicate a clear but practically diminishing distinction between the pricing practices of nonprofit and investor-owned hospitals. In addition, some evidence is found that the presence of an HMO contract diminishes the ability of a hospital to cost shift. Thus while support is found for the existence of cost shifting in the 1980s by nonprofit hospitals, the potential for future cost shifting may be limited. An important policy implication is that cost-control efforts should focus on increasing information to purchasers rather than regulating prices of hospitals.
|Year of publication:||
|Authors:||Highland, James Patrick|
|Type of publication:||Other|
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