Cost Shifting in Healthcare


There is a widely held belief, perhaps unspoken but no less strongly held, that the healthcare business is a zero-sum game.

Consider how healthcare dollars are generated.   A hospital system, care facility, or provider provides a service to the surrounding area, termed a catchment area.  Those covered lives in the catchment are expected to generate a certain amount of healthcare expenditures on an aggregate, population basis.  This is modeled by insurers and hospital systems for budgetary purposes.  Given the number of people in the catchment area, the age, socio-economic status, general degree of illness, and type of insurance, finance professionals and actuaries can make an estimate of expected healthcare dollars by payors (insurers, government) to providers and facilities on a per patient basis.

While modifiers, complications, and co-morbidities can alter the real billing for a particular patient and encounter, on aggregate most in the healthcare industry tend to think that these care dollars will either be captured by their system or a competitor.  Hence, zero-sum.  That understanding probably accounts for the ‘me too’ effect in healthcare, as once one system purchases a gamma knife, the other system will to, as they are unwilling to let the competitor capture those lives with the resulting profit strengthening one system over the other.  

But this zero-sum mentality trickles down as well from the CEO level to employees, particularly middle management.  Consider the service line manager – given a fixed budget, bonused on cost savings vs that budget ceiling.  You have value-added services that earn revenue.  However, you also have compliance-related non-value add mandatory services which are essentially costs.  What’s one way to improve the service line budget?  By keeping the valued added work and pawning off the non-value added work as much as possible on someone else.  By having your clinicians bill separately for services, and requiring by medical staff privileges that ‘cherry picking’ is not allowed, you make sure your clinicians will provide services to the indigent as well as the insured.  But you don’t have to pay your clinicians for that work.  By requiring department chairpeople to design standard orders, you avoid having to hire consultants to do the same thing.  Cost-shifting onto the non-employed physician is a well-known phenomenon.  Don’t think that it doesn’t work the other way, however!  On a busy friday afternoon, a family practitioner sends a complicated elderly patient to the ER with a weak complaint which requires evaluation.  When it is time to discharge the patient, the family members can’t be found and the physician, who does not have privileges at the hospital, won’t answer the phone.  An economist would argue that each of these individuals acted in their own best interest, but the cost to the patient and the system, as well as the payor, is high.

As physicians are employed in the hospital system,  the situation gets more complex.  Cost-shifting behavior dies slowly, but the mid-level administrator is merely shifting costs within the system to another service line manager to meet their own budgetary  or productivity goals.  Without an institutional understanding of why this behavior is maladaptive, and management processes in place to make sure this does not happen, the result is that employed physician is cost shifted upon – and that person has lost the ability to cost-shift herself back to maintain equilibrium by virtue of employment.  This is a problem, because it can cause physician dissatisfaction, a declining quality of care, and ultimately physician burnout.  And currently, there does not seem to be any governance model in place to prevent this (At least, I’m unaware of them).  What will ultimately happen is service lines will be missing key players, resulting in missed revenue opportunities for the system – essentially giving their competition the edge – in light of positive budgets and productivity goals.  This will leave most executives scratching their heads, as the relationship is not directly seen.  The bottom line is that you can’t cost shift onto yourself.  Systems employing physicians in significant numbers would be wise to learn this quickly.