Pricing by Non-Profit Institutions: The Case of Hospital Cost Shifting

This paper shows that a hospital whose objective function includes output as well as profits may raise price to private paying patients in response to cuts in the price it receives for Madicaid or Medicaid patients. Evidence is presented to show that hospitals in Illinois cost shifted in response to substantial reductions in Medicaid payments in the early 1980s. As private sector pricing becomes more competitive, however, the ability and willingness of hospitals to cost-shift will wane.