Would eliminating the uncompensated care cost shift reduce overall spending?

What’s Behind It?

“Cost shift” is a term used to describe the costs that one group pays to cover another group’s use of services. Providers who treat the uninsured or members of government programs such as Medi-Cal often receive payments that are less than the actual costs of providing care. Providers have to make up for such losses by charging higher prices to other payers. As a result, the premiums paid by employers and individuals buying insurance are higher than they would be in the absence of this cost shift. Many believe that these higher premiums, which Governor Schwarzenegger has said represent a “hidden tax,” lead more Californians to forego coverage as it grows increasingly unaffordable.


The Broader Picture

Changing who pays will not alter the underlying costs of care. If cost-shifting were eliminated, premiums would be somewhat lower for private payers and higher for public payers. A small subset of consumers—those on the fence about the value of coverage—might find lower private premiums a sufficient incentive to purchase coverage. But to reduce overall health spending, changing who pays won’t be enough; efforts to manage service use or reduce care delivery costs are required.

Providing coverage to those who are uninsured could instead increase the total cost of medical care. Research indicates that the uninsured use roughly half the services they would if they were fully insured. Therefore, expanding coverage may actually add to the total cost burden as more services are delivered to those newly covered.

Market realities may mute the impact of eliminating the cost shift. There is evidence that uncompensated care costs contribute to higher premiums for commercial payers, but it does not follow that eliminating the cost shift would immediately lower commercial premiums throughout the state. Because most payers engage in multi-year contracts with providers, savings would phase in over time as contracts were renegotiated. Purchasers, hospitals and physicians, and health plans wield different levels of market power in different California communities. The balance of market power could influence the degree to which eliminating the cost shift translated into lower commercial premiums.


The Bottom Line

Eliminating the cost shift would make some consumers and payers better off but would not affect overall health spending. To influence total health spending would require additional efforts, such as restricting service use or reducing care delivery costs. Nevertheless, there may be other important reasons to address the cost shift: for example, to make costs more transparent and to address significant inequities among consumers and providers of care that are inherent in the current system.

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For More Information 

• Allen Dobson, et al., “The Cost-Shift Payment ‘Hydraulic:’ Foundation, History, and Implications,” Health Affairs 25:22,1/06.
• Families USA, Paying a Premium: The Added Cost of Care for the Uninsured, 6/05.
• Peter Harbage and Len M. Nichols, A Premium Price: The Hidden Costs All Californians Pay in Our Fragmented Health Care System, New America Foundation Issue Brief #3, 12/06.
• Gerald F. Kominski and Dylan H. Roby, Estimating the Cost of Caring for California’s Uninsured, UCLA Center for Health Policy Research Policy Brief, 5/04.