Does Medicare Cause Hospital Payment Cost-shifting?

Research carried in Health Affairs challenges the long-held view that the reduced payments Medicare makes to hospitals lead to cost-shifting to the private sector, with private health plans therefore having to pay more to hospitals for the same services.   (HA Article)    There is no debate that Medicare pays hospitals significantly less than do private health plans.  Medicare is basically in a position where it dictates hospital payments, subject only to political constraints resulting from hospital lobbying or beneficiary complaints that might result from access issues.  Private health plans cannot dictate payments and hospital consolidation has often put them in a weak bargaining position.  This author tried to develop a more sophisticated model to understand the effect, if any, of Medicare payment rates on private insurer reimbursements.  Part of the issue is understanding the relationship between payment rates and hospital internal costs–do lower payments cause hospitals to manage their costs better to maintain margin; or vice versa, do higher payments cause hospitals to spend more, maintaining but not increasing margins; and is there spillover between Medicare reimbursement effects and private insurer ones.  The author looked  at comparative Medicare and private payments over 15 years, making a number of adjustments.  Over the period of the analysis, the gap between Medicare and private payments has grown from 45% to 57%.  However, the study also found that markets with higher Medicare payment growth, due to some of the factors Medicare uses to adjust payments, also had higher private payment growth, and those with lower Medicare payment growth had lower private payment increases.  The strongest association with trends in private payment rates was the percent of the population in poverty in the market area, which seems hard to explain.  Major limitations of the study, however, include the relatively small private claim database used and the exclusion of HMO patient claims from the database, and a likely inability to fully capture hospital internal cost trends accurately and measure a direction of causation.