PHYSICIANS' COST SHIFTING BEHAVIOR: MEDICAID VERSUS OTHER PATIENTS

I. INTRODUCTION Much of the debate about rising health care costs in the U.S. centers on the notion of "cost shifting." Cost shifting is loosely defined as charging one set of patients a higher price to offset losses on another set of patients. For example, to offset losses from treating charity patients, a hospital might charge a relatively high price to privately insured patients, or a physician might increase his standard fee to compensate for lower Medicare reimbursements. Despite the certainty of the conventional wisdom, empirical evidence of cost shifting is, at best, mixed. In a study of Illinois hospitals in the early 1980s, Dranove (1988) finds evidence of cost shifting from government patients, primarily Medicaid and Medicare recipients, to private patients. Morrisey and Sloan (1989) find evidence of cost shifting in urban hospitals but not in rural hospitals. Several other empirical studies find no evidence of cost shifting. One aspect of the cost shifting debate that the empirical work has ignored is whether or not doctors - as opposed to hospitals - practice cost shifting. Although standard profit-maximizing models of physicians would rule out cost shifting, the widely used "income targeting" model of physicians (Feldstein, 1993) does allow for such behavior. The probable reason for the dearth of empirical work is the lack of good data on physicians' pricing behavior. The analysis here uses the Physicians' Practice Costs and Income Survey, 1983-1985 (PPCIS, expanded version) to investigate this important question. The PPCIS includes a set of questions asking physicians their standard fees and Medicaid reimbursement rates for a variety of medical and surgical procedures. The survey also contains detailed information on the physician and medical conditions in the local geographic area. The basic research methodology is straightforward. Since Medicaid reimbursements are largely controlled by state legislatures, considerable variation exists in reimbursement rates across the United States. If cost shifting is a widespread phenomenon, one would expect that relatively low reimbursement rates would result in higher fees to privately insured patients, controlling for other factors. If cost shifting does not occur, one would expect Medicaid reimbursement rates to have no effect or possibly result in lower fees depending on the market structure facing the physician. The analysis also examines additional evidence that suggests that lower Medicaid reimbursements lead physicians to treat fewer Medicaid patients. The results suggest that physicians do not practice "cost shifting" but instead act in a way consistent with the hypothesis of profit-maximization for a firm with some market power. That is, lower Medicaid reimbursements tend to lead to lower prices to privately-insured patients. This appears to be true across a wide spectrum of procedures performed by different specialties. Also consistent with the profit-maximization hypothesis, lower Medicaid reimbursements tend to cause physicians to treat relatively fewer Medicaid patients. II. ALTERNATIVE MODELS OF PHYSICIAN BEHAVIOR Health economists widely recognize that profit maximization precludes cost shifting. However, since most of the cost shifting literature focuses on non-profit hospitals that may be more likely to engage in cost shifting, reviewing the implications for physicians seems useful. Profit maximizing models of physician behavior preclude cost shifting because under a maximization hypothesis, physicians extract as much as possible from all their patients under all circumstances. To say that physicians can shift costs from one set of customers to another, or more specifically, get more revenues from one set of customers to offset a decrease in revenues from another, is to say that the physicians were not profit maximizing in the first place. To fix this principle, consider a stylized model of physician behavior. …