Hospital cost shifting—charging private payers more in response to shortfalls in public payments—has long been part of the debate over health care policy. Despite the abundance of theoretical and empirical literature on the subject, it has not been critically reviewed and interpreted since Morrisey did so nearly 15 years ago. Much has changed since then, in both empirical technique and the health care landscape.

This article examines the theoretical and empirical literature on cost shifting since 1996, synthesizes the predominant findings, suggests their implications for the future of health care costs, and puts them in the current policy context.

The relevant literature was identified by database search. Papers describing policies were considered first, since policy shapes the health care market in which cost shifting may or may not occur. Theoretical works were examined second, as theory provides hypotheses and structure for empirical work. The empirical literature was analyzed last in the context of the policy environment and in light of theoretical implications for appropriate econometric specification.

Key Findings:

• Most of the analyses and commentary based on descriptive, industrywide hospital payment-to-cost margins by payer provide a false impression that cost shifting is a large and pervasive phenomenon.
• More careful theoretical and empirical examinations suggest that cost shifting can and has occurred, but usually at a relatively low rate.
• Margin changes also are strongly influenced by the evolution of hospital and health plan market structures and changes in underlying costs.

Policy-makers should view, with a degree of skepticism, most hospital and insurance industry claims of inevitable, large-scale cost shifting. Although some cost shifting may result from changes in public payment policy, it is just one of many possible effects. Moreover, changes in the balance of market power between hospitals and health care plans also significantly affect private prices. Since they may increase hospitals’ market power, provisions of the new health reform law that may encourage greater provider integration and consolidation should be implemented with caution.