On May 23, 2024, the House Committee on the Budget convened a hearing at which Chapin White, the Congressional Budget Office’s Director of Health Analysis, testified about how consolidation among hospitals and physicians affects the federal budget. In the Q&B below, CBO responds to a question for the record submitted by Chairman Arrington.
Question. Can you address profit maximization and whether hospitals are cost-shifting to make up for underpayment in other markets? Does CBO believe that site neutral payment reform in Medicare would lead to increased commercial market prices?
Answer. The idea behind cost shifting is that in order to cover their fixed costs, hospitals need to negotiate higher prices with commercial insurers to offset payment cuts made by Medicare and Medicaid. From the perspective of economic theory, it is unclear why hospitals would negotiate higher prices with private payers only after they experienced payment reductions from public payers. In CBO’s assessment, the preponderance of the research evidence suggests that hospitals do not engage in cost shifting. Therefore, in CBO’s view, expanding Medicare’s use of site-neutral payments (in which the payment for a service does not vary by the setting where the service is provided) would not increase the prices paid by commercial insurers.
This document is available on the CBO website.