Many hospitals use a strategy known as cost shifting. Hospitals make up for the lower unit costs on Medicare and Medicaid patients by shifting costs to commercially insured patients. In 2008, Milliman research estimated that cost shifting contributed to an additional $1,800 in shifted cost per American family—10.7% more than the total cost in a environment without cost shifting.

The understanding of cost shifting evolved again with a March 2010 study commissioned by the National Business Group on Health. The study looks at 65 cities and confirms that hospitals are in many cases cost shifting in the inpatient setting. But the study also identifies 16 cities where hospitals do not shift costs. Hospitals in these cities find ways to become more efficient and operate with a suitable margin on all their work—commercial, Medicare, and Medicaid.

Cost shifting is not inevitable, which is fortunate, because it is unlikely to remain a sustainable strategy in the healthcare environment that is now emerging. The combination of an aging population and universal healthcare will expand the population of Medicare- and Medicaid-eligible patients. This population shift will put a real strain on hospital bottom lines unless they can become more efficient.