Government
Cutbacks in Hospital Reimbursement:
Who Bears the Burden?
David
Dranove and William D. White
Abstract
During the past decade, there have been substantial
cutbacks in Medicaid reimbursements to hospitals in relation to
the costs of providiing care. We use data from California for fiscal
years 1983 and 1992 to explore the question of who bears the burden
of these cutbacks. One widely discussed hypothesis is that hospitals
offset the cutbacks by raising prices and revenues from privately
insured patients, i.e., there is "cost-shifting." Under
this hypothesis, neither Meidicaid patients nor hospitals suffer;
the burden falls on privately insured pateints. An alternative hypothesis
is that hospitals respond to lower Medicaid payments by reducing
the services they provide to Medicaid patients. Finally, the burden
may fall on hospitals, through reduced profitability. We find little
evidence of cost-shifting. Rather, we find support for the latter
two hypotheses. We cannot rule out the possibility, however, that
hospitals do cost-shift to some extent. The reductions in services
and profitability that we measure may in part be due to the changes
in the private insurance marketplace. Even then, our paper provides
powerful evidence that the hardest-hit hospitals—those that
depend on Medicaid for a disproportionate amount of revenue—cannot
cost-shift their way to financial security.
David Danove,Kellogg Graduate School of Management, Northwestern
University
Wiliam D. White, University of Illinois at Chicago
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