PAYMENT SOURCE AND THE COST OF HOSPITAL-CARE - EVIDENCE FROM A MULTIPRODUCT COST FUNCTION WITH MULTIPLE PAYERS

This study investigates the capacity of hospitals to vary the intensit y of their services based on patients' expected sources of payment, Wh ile the concept of price discrimination by hospitals based on payer ge nerosity (''cost-shifting'') has been discussed extensively, the notio n that hospitals can adjust payer-specific marginal costs to reflect d ifferences in reimbursement policies has not been studied in depth. To examine this issue, this analysis employs a multiproduct cost functio n with hospital outputs defined as admissions by payment source, contr olling for the distribution and severity of illness (''casemix'') for each payer. Marginal costs of casemix-adjusted discharges are obtained and compared for Medicare, Medicaid, Private Payers, and a residual c ategory that includes uncompensated care. We find that indeed, payer-s pecific marginal costs generally reflect payer generosity.