ABSTRACT: A longstanding debate in health economics and health policy concerns how hospitals adjust prices with private insurers following reductions in public funding. A common argument is that hospitals engage in some degree of “cost-shifting,” wherein hospitals increase prices with private insurers in response to a reduction in public payments; however, evidence of significant costshifting is mixed, and the rationale for such behavior is unclear. We enter this debate by examining plausibly exogenous variation in Medicare payment rates generated by two policies under the Affordable Care Act: the Hospital Readmission Reduction Program (HRRP) and the Hospital Value Based Purchasing (HVBP) program. We merge rich hospital-level information to actual private-payer payment data from a large, multi-payer database. Our data include roughly 50% of inpatient prospective payment hospitals in the United States from 2010 to 2015. We find that hospitals that faced net payment reductions from HRRP and HVBP were able to negotiate 1.5% higher average private payments – approximately $155 extra for the average acute care claim, or $82,000 per hospital, based on an average hospital penalty of nearly $146,000. We find the largest increases in payments for circulatory system (2.7%) and nervous system (3.2%) claims. We also find significant heterogeneity by payer mix, where cost-shifting is largest for hospitals with higher shares of private insurance patients.
