Cost shifting revisited: the case of service intensity.

This paper examines whether a health care provider's choice of service intensity for any patient group affects its cost shifting behavior. Our theoretical models indicate that firms may respond to lower prospective payment by decreasing service intensity to all of its patient groups, thereby giving firms an alternative to cost shifting. Additionally, the conditions under which cost shifting and lower service intensity occur are identical, regardless of profit status. Using a panel of California hospitals, we found that nonprofit hospitals do cost shift, while profit-maximizing hospitals do not. However, both firms respond to lower prospective payment by decreasing service intensity, thus supporting our theoretical conclusion that lower service intensity can be used as an alternative to cost shifting.