I recently came across an article by Uwe Reinhardt in Economix on equalizing payments. He addresses the price discrimination in healthcare costs and the cost shifting among public and private payers.
While there evidently is pervasive price discrimination within the private health-care sector, there are also sizeable price differentials between public payers on the one hand and private payers on the other.
The article is really great and the discussion of other multi-insurance regimes in Germany and Switzerland is really insightful, considering the recent question of the right structure of healthcare.
I do think that it’s important to analyze the more positive or interesting effects of price discrimination. For instance people with access to certain governmental benefits (Medicaid/Medicare) tend to have less price elasticity in healthcare expenditure. Once one can differentiate consumer based on elasticity, that is those on benefits and those not on benefits and moreover, between those that are wealth and those who aren’t, its more efficient (profit wise) to shift output from the consumer’s with low elasticity to those with higher elasticity. Resulting in higher costs for the inelastic consumer and lower costs for the elastic consumer.
Now since price discrimination in healthcare can occur between the rich and poor, then the effect of benefits on such discrimination should be acknowledged. Reinhardt mentions that the concept of cost shifting in healthcare because of price discrimination is really not of concern to the debate. However, I argue that if one looks at price discrimination and elasticity of various consumer sectors then one may explain certain effects caused by Medicare/Medicaid and how price discrimination itself helps avoid some of their negative fallout.
For instance, assuming that no benefits exist and two different consumers exist in the market then output will shift to the elastic one and price will rise to the inelastic one. Depending on severity the price increase could be very large; one has to remember that the hospital is assumed to be profit maximizing.
Now from this point imagine that the poorer customer has a less elastic demand. This would mean that the shift of prices and output would be smaller. This may explain why Reinhardt doesn’t care much for cost shifting in this sector as the benefits make it so the hospitals have difficulty differentiating between consumers. And in most cases can force them to lower operating costs versus shifting output. This is because the price discrimination analysis focuses mainly on changes in elasticity, not changes in costs between different segments.
Now, recent research (as recent as 2013) has shown that Medicaid has actually possibly reduced private insurance costs instead of shifted.
Using regression analyses, I found that a 10 percent reduction in Medicare payment rates led to an estimated reduction in private payment rates of 3 percent or 8 percent, depending on the statistical model used. These payment rate spillovers may reflect an effort by hospitals to rein in their operating costs in the face of lower Medicare payment rates. Alternatively, hospitals facing cuts in Medicare payment rates may also cut the payment rates they seek from private payers to attract more privately insured patients. My findings indicate that repealing cuts in Medicare payment rates would not slow the growth in spending on hospital care by private insurers and would in fact be likely to accelerate the growth in private insurers’ costs and premiums.
Now, like I mentioned Reinhardt probably ignores this (or at least doesn’t put as much weight on it) because just basic price discrimination analysis doesn’t reflect cost shifting. However, as prices for the private insurers (generally more wealthy) fall (realistically increase slower) in response to more Medicaid I could argue that it’s because of the changing elasticity of the other consumers. They become less elastic and thus the shift in price discrimination is not large and maybe sometimes non-existent.
In reality, the explanation of the pressures of Medicaid on operating costs, at least in the short-run makes more sense (lack of direct of cash subsidy). In the long-run programs like Medicaid generally don’t help costs for the general market. In that case price discrimination by doctors may explain why possibly costs haven’t sky rocketed similarly to what some pundits claim. Costs may generally rise under government subsidization of certain people’s incomes but its more nuanced than that. And like Reinhardt says, in general price discrimination doesn’t mean cost shifting and even if Medicaid reduces price discrimination effects it certainly doesn’t remove it completely.
To conclude his piece, Reinhardt advocates for “All Payer” system. A system in which costs are negotiated by all insurers and hospitals as a whole and thus same rate is applied to public and private consumers. This system in my opinion has one large benefit and that is less administrative costs, and thus makes it incredibly attractive. However, allocation arguable is not more efficient but possibly more equal, more charitable. For instance, Maryland introduced this system and these were the results for uncompensated costs:
In Maryland, the “reasonable costs” of uncompensated care are recognized in payment rates, and all payers contribute equitably to covering these expenses. Hospitals therefore have a financial incentive to treat all patients. Between 1978 and 2007, uncompensated care in Maryland rose from 4.0 percent of revenue to more than 8.1 percent of revenue (from $36 million in 1977 to $927 million in 2007).13 The uninsured have access to all hospitals, including private community facilities and the state’s two well-known academic medical centers.
This is a relatively important thing to consider, as the low administrative costs possibly could have helped Maryland cover costs for the low-income patients. However, possibly it could be because in general public insurers don’t skip out on costs by getting lower prices because of their relative elasticity. This means that some people maybe be able to get care when needed, but it’s mostly likely not allocativily efficient and the poor who can just afford to pay will be most effected. Not sure what the possibly consequences on the public funding is.
If the aim of American healthcare policy is just to increase uncompensated care access then possibly an All Payer system like Germany of Switzerland works, but to have an efficient and arguably one that is more allocative then price discrimination ought to continue. However, when people are given public insurance and price discrimination occurs arguably to cover for costs access doesn’t increase. Because only private insurers (generally wealthier) can cover costs, so their prices are dropped (relatively)or operating costs are dropped. Either way uncompensated care decreases. This shows possibly an explanation of public provision’s negative effect on uncompensated care. But still All Payer theoretically offers more “charitable care” from generally profit seeking hospitals.
Personally, I think instead of looking at Maryland alone one should look at the European states. Macroeconomic pressures are much more prevalent in Germany than Maryland for instance and thus the general reality of such an All Payer system may be more allocative than imagined as it could limit the oligopoly power of insurers. This is possible but can’t be proven without strict analysis of market structure of insurers in Germany, a subject I am not familiar with at all.
P.S. I just realized I have the most scattered thoughts ever, but if you can’t be scattered on the internet where else.