"Dr. Mu did not received the $117,000 as a private check from Mr Drier."

You are correct. I misread it.

I agree that it's price gouging.

"that's the very definition of subsidy,"

A broad definition of subsidy could include a bribe. For example, one interpretation is that people won't become chief neurosurgeons unless you bribe them. In any case, it was an example to illustrate the difference between subsidize and not very lucrative. I'll change the numbers to $500,000 with only Medicare patients (this is about what they make in the UK, so surely enough that people will decide to be chief neurosurgeons) and $3,000,000 with only non-Medicare patients - a very lucrative income indeed.

I see that part of my confusion in understanding the topic is that there are multiple definitions of "cost-shift". In economics - I earlier quoted from an economics paper - it's a "dynamic response by hospitals to a reduction in Medicare payments, in the form of a fully or partially compensating increase in prices charged to private insurers. In the policy debate over Medicare payments, however, cost shifting is defined broadly as payments that fall short of the costs incurred by hospitals in the treatment of Medicare beneficiaries, as measured through negative hospital margins on those patients." (Quote from http://content.healthaffairs.org/content/30/7/1265.long )

I was talking about the former, which excludes price discrimination. The chart you link to shows the latter, which is a broader category. Indeed, the paper I just referenced, titled "Hospitals Respond To Medicare Payment Shortfalls By Both Shifting Costs And Cutting Them, Based On Market Concentration" goes into the details. It's quite a lovely paper.

> [Abstract:] The study presents empirical evidence that, faced with shortfalls between Medicare payments and projected costs, hospitals in concentrated markets focus on raising prices to private insurers, while hospitals in competitive markets focus on cutting costs.

> ... Payment rates from Medicare to hospitals have lagged behind the growth in hospital costs over recent years, leading to negative hospital profit margins on publicly insured patients.1,2 These negative Medicare margins have reignited the long-standing debate over whether the public insurance program is partially responsible for the high prices charged to private insurers, as hospitals seek to offset losses on one set of patients with profits from another.3–7

> Recently, however, the Medicare Payment Advisory Commission (MedPAC) staff has proposed an alternative explanation for negative Medicare margins, one that reverses the direction of causality and interprets Medicare payment slowdowns as a means toward the reduction of hospital costs rather than a shifting of costs from public to private payers.8

As I understand it, the MedPAC model gives an explanation of why the chart you pointed out isn't an example of cost shifting in the economics sense of subsidy. The paper then assesses the viability of the two models and finds they are complementary strategies. The key factor to choose one over the other is the "degree of concentration or competition in the local hospital market."

I liked the observation about the non-economic factors that go into raising revenue rather than lowering cost:

> It generally is more desirable, from a hospital management perspective, to increase revenues than to reduce costs, because the former merely alienates insurers, but the latter alienates employees, physicians, and potential patients. The cost-shift perspective highlights the revenue-enhancement hospital response to Medicare payment shortfalls.

The economic model of Frakt and others, which says that in a competitive marketplace there is no cost-shifting in the subsidy sense is not new, so you needn't track down more from that author to investigate any specifically unusual personal bias. See for example http://www.ebri.org/pdf/briefspdf/1296ib.pdf for a similar paper from 1996, which says:

"Rather than cost shifting [in the subsidy sense], the existing evidence points to hospital competition limiting the provider's ability to raise prices. Whatever market power hospitals once enjoyed is disappearing—and with it the ability to cost shift."

Under this model, the payment shortfall charts are actually a measure of how competitive the hospital environment is.

I read some of the CMS paper you linked to. It comments how "When the Medicare inpatient hospital prospective payment system was introduced in 1984, Congress applied reductions of 0.4 to 3.8 percentage points to the annual payment updates for most of the first 20 years of operation without causing hospital bankruptcies or withdrawal from the Medicare market."

I think that's a very good indicator, though perhaps not the best socially. I therefore think it's odd that they use "Hospitals have been pushing back in recent years against payment reductions aimed at further reducing inefficiency, a signal that much of the achievable gains may have already been made" as a more recent indicator. I know from the 1996 paper that there was a large debate on the topic already in the 1990s, so how does the Office of the Actuary judge if the pushback now is stronger and more meaningful then 20 years ago. Shouldn't they be using the same measure? Has there been an increase in the number withdrawals from the Medicare market?

In any case, I agree with the overall tone of the paper. I agree that there will have to be changes in the Medicare system some time in the next 50 years. I don't agree that the lack of a perpetually effective system is of great concern. If we could do that, we wouldn't need any legislative branch.