Cost-Shifting and Cost-Cutting as Joint and Mutually Reinforcing Strategies in the Financial Management of Hospitals and Similar Healthcare Organizations

Abstract

This study examines cost-shifting in private, investor-owned Pennsylvania hospitals to construct a model of joint cost-shifting and cost-cutting strategies in healthcare finance. Rather than add to the debate about the cause, magnitude, and intensity of cost-shifting, which this study reviews and for which the jury is still out, it addresses questions about why, when, and how cost-cutting might be complementary to cost-shifting. It suggests that cost-cutting may be blended with cost-shifting when overheads and transaction costs (typically for administration and regulatory compliance) are substantial and cannot be cross-subsidized. Cost-cutting might also blend well where increased charges or list prices to offset reimbursement shortfalls and uncollectible payments are capped by payers who will have to bear the additional financial burden. The net profit (income) generated from the former method — which this study refers to as indirect (or “backdoor”) cost-cutting — represents a variable fraction of the original cost of care. That percentage may be adjusted depending on the amount of operating expenses that needs to be covered and based on successful (re)negotiation with payers. The latter method — which refers to direct cost-cutting — seeks at minimum a break-even outcome. A hospital will not likely realize any net gain under the direct method, but it totally eliminates the net loss arising from price-capping. This it achieves by reducing the cost of care to patient cohorts. Joint and mutually reinforcing cost-shifting and cost-cutting strategies should nonetheless be considered along with other viable options or alternatives, and in light of the reciprocal choices and actions that payers of the new or additional charges are bound to make.

Keywords: Cost of care; charges; margin; net profit (income); patient cohort; pricing; reimbursement; revenue; transaction costs

JEL classifications: G3; I13; I18; I19