What is Cost-Shifting?

Cost-shifting is an economic practice that allows cost demands to be met by shifting some of the liability to another group of payers. There are many industries and businesses that engage in cost-shifting, though the health care system is perhaps the most common example. Some see cost-shifting as necessary to prevent job loss or diminishing services in the wake of unpaid costs. Critics often characterize it as a means of increasing already healthy profits by forcing some population segments to overpay.

At a basic level, one of the major factors in cost-shifting in the medical practice is that not all people can afford to pay for medical services. To this end, government medical agencies, such as Medicare, will reduce the financial burden on low-income citizens by setting prices that Medicare patients can be charged that are often well below the going rate for services. To make up for this deficit, hospitals and doctors may then choose to charge patients with private insurance, or those who self-pay, more for services. The cost, in effect, is shifted to higher income parts of the population in order to allow those in poverty access to medical care. Even this basic explanation, however, is only one way of looking at cost-shifting; depending on point of view, this practice may either be a necessary part of social services or highway robbery capitalized upon by both hospitals and insurance companies to increase profits.

Cost-shifting may also be applied to how a service is paid for. Employers that offer health care benefits to employees often share a percentage of the cost of the insurance plan with their workers. If money is tight, however, thanks to a recession or bad business, employers may shift more of the financial liability to the employees. In many cases, this is not the result of a grab for additional profits, but a way to allow the company to keep the plan at all. Cost-shifting in this manner can sometimes allow everyone to stay insured, or reduce the need for furloughs and layoffs due by reducing expenses.

The airline industry is another place where cost-shifting may occur. If the price of fuel significantly increases, airlines may respond by charging increased ticket prices, but may also shift costs by making formerly free services both optional and available for a price. Charging for bags, food and beverages, and wi-fi access can all be forms of shifting costs so that the same services can be available despite increased financial liability.