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 intensity of their services based on patients' expected sources of payment, While the concept of price discrimination by hospitals based on payer generosity (''cost-shifting'') has been discussed extensively, the notion that hospitals can adjust payer-specific marginal costs to reflect differences in reimbursement policies has not been studied in depth. To examine this issue, this analysis employs a multiproduct cost function with hospital outputs defined as admissions by payment source, controlling 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 category that includes uncompensated care. We find that indeed, payer-specific marginal costs generally reflect payer generosity.