Association for Public Policy Analysis & Management

Medicaid reimburses health care providers for medical services at a lower rate than any other type of insurance coverage. To make up for the burden of treating Medicaid patients, providers claim that they must raise the rates of individuals covered by private insurance – a phenomenon referred to as cost-shifting. The current literature attempting to identify and measure the degree of cost shifting in the US health care market has produced mixed results. In this paper, I examine cost-shifting with a new identification strategy where I exploit a Medicaid expansion for the disabled where for every new Medicaid enrollee another individual dropped private coverage, creating an opportunity for significant cost-shifting. Using the Healthcare Cost and Utilization Project’s Nationwide Inpatient Sample, I first replicate previous findings from the March Current Population Survey and the Survey of Income and Program Participation and demonstrate that there is 100 percent crowd-out from these particular Medicaid expansions. Next, I find that hospitals reduce the charge rates of the privately insured, a result that is consistent with profit maximization in the simple two-sector mixed-economy model outlined by Sloan et al. (1978). The results suggest that hospitals are not employing cost-shifting strategies as they claim.