Price Differentials Are Not Evidence of Cost Shifting

by Austin Frakt
The Incidental Economist Blog
October 5, 2009

A recent Business Week article summarized an argument against a public option that is based on the unfounded claims of cost shifting made by insurers and hospitals. In it Jane Sasseen and Catherine Arnst write

Proponents add that government competition would force private insurers to lower premiums, making coverage more affordable for all.

But the business community keeps cranking out studies undercutting such arguments. The insurance industry trade group, America's Health Insurance Plans (AHIP), compared the lower reimbursement rates for health care paid by public programs vs. private payers. The group claimed the difference reflects cost shifting, which added an estimated $1,512 to the average premiums paid by a family of four. "The existence of the private sector allows that shift," says Karen Ignagni, the head of AHIP. "If you clamp down on one side of a balloon, the other side just gets bigger."

Ignagni's balloon analogy is a false one, and AHIP's cost shifting argument is faulty. It is based on a study that misapplies the term "cost shift" to price differentials.

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