Joe Lieberman is 21% Right (And 79% Wrong)

Joe Lieberman’s latest excuse for not supporting a public option is that it would pay lower prices to hospitals, which would then make up the difference by charging higher prices to everyone else.1  This is called “cost shifting,” and this morning I got a timely email from Austin Frakt telling me that there was some handy new high-quality research from Vivian Wu on exactly this question.  Is Lieberman right?  Is cost shifting real?

Wu’s main result is that on average prices paid to hospitals by private payers increases by 21 cents in response to each dollar reduction in public revenue. By way of comparison, this 21% rate of cost shift is about half of the lowest estimates produced by industry studies and is far below their common assumptions of 50% to 100%.

….The policy implications are clear. Wu doesn’t state them, but I will. Within the range of variation studied by Wu, with respect to hospital payments, overall health costs can be reduced by 79 cents per dollar of Medicare payment reduction, the other 21 cents being shifted to the private sector. However, the more competitive the hospital market the less the cost shift. For some hospitals in some markets Wu found cost shifting rates as low as 5%. Therefore, sound public policy would encourage greater competition among providers (wherever possible) in tandem with reductions in public payments. Doing both concurrently would reduce public health expenditures with minimal impact on private payments.

In other words, Lieberman is, at most, 21% right.  There’s a little bit of cost shifting, but the vast majority of payment reduction actually goes toward reducing payments.  Hospitals might not like that, but why shouldn’t the rest of us?

And this reminds me: I’ve got several posts from Austin bookmarked that I never quite got around to blogging about, and I suppose at this point I never will.  They tend to be pretty wonky, but if you like that kind of stuff you should check out his blog.  It’s called The Incidental Economist.

1Actually, I don’t know for sure if this is his latest excuse.  He changes them too fast for me to keep up.  But I’m pretty sure this was one of the more recent ones.

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