Economics discussion 7 peer responses

In responding to  your classmates’ posts, agree or disagree with their conclusion on the ethics of “cream-skimming.” What role do Medicare and Medicaid play in this determination—are hospitals paid enough by these governmental payers?

Post #1

Donna Coleman 

Hello class,

Due to low reimbursements for hospitalization and inpatient services, some can hospitals face financial challenges (Henderson, 2018). Insurances like Medicare and Medicaid are responsible for paying a large percentage of hospital charges causing financial instability for those organizations that serve many patients with these insurances because of the low reimbursement rates (Henderson, 2018). Since these insurances do not cover the total charges, hospitals sometimes make up the fiscal deficit by shifting services to patients with private insurances with the process of cost-shifting (Henderson, 2018). The cost-shifting theory is when hospitals shift the cost of care for the uninsured and underinsured to private payors. This allows the hospital to continue offering low-cost services to patients by providing the same services to patients with private insurances for a higher amount. Shifting the costs could help the hospital to make up for the loss (Henderson, 2018).  For cost-shifting to occur the hospital must be able to increase prices above the competitive or allowed level for its market and cannot exceed current maximum assigned fees from private payors (Zwanziger & Bamezai, 2006). Research shows that cost-shifting allowed some hospitals to boost revenue. Reports data based on for-profit hospitals in California showed that at one point there was a 1% decrease in Medicare reimbursement rates resulted in a 0.17 increase in services charged to and paid by private carriers and a 1% decreased in Medicaid rates led to a 0.04 increase in reimbursement from private insurances, this shows how significant and impactful Medicare and Medicaid payments are to hospitals and the theory of cost-shifting (Zwanziger & Bamezai, 2006). This leads me to think that cost-shifting might not be the right thing to do but could be the only alternative for some hospitals to obtain and maintain financial stability.

Cream-skimming is when patients are assessed and treated based on the type of insurance or other characteristics than their need for medical care (Friesner & Rosenman, 2009). Some hospitals apply cream-skimming by seeing fewer sick patients or fewer patients with severe illnesses who have government insurances or lower-paying managed care plans (Friesner & Rosenman, 2009). The strategy is used to minimize the patient encounters that could inflate costs and return low payments like admissions, longer hospital stays, and additional testing and procedures. In a sense, cream-skimming can be associated with cost-shifting (Friesner & Rosenman, 2009). Hospitals can apply cream-skimming if the number of patients with lower payers exceeds the number of patients with private insurances (Friesner & Rosenman, 2009). According to Friesner & Rosenman (2009), this tactic of seeing fewer severely ill patients could lead to gain and efficiency and have proven to be effective for hospitals of all sizes. Hospitals figure if they can potentially treat fewer sick patients they can boost production efficiency by treating a larger number of less ill patients with the same staff and resources, they can gain a greater level, based on their payer mix (Friesner & Rosenman, 2009).

Cream-skimming can have adverse reactions such as negatively impacting patients with chronic illness (van de Ven & van Vliet, 1992). This could create a barrier for severely ill patients to access care and result in poor health outcomes (van de Ven & van Vliet, 1992). Insurance plans can also seek to offer better contracts to providers who treat fewer severely ill patients and offer lower-paying contracts to those who treat a higher percentage of these patients (van de Ven & van Vliet, 1992). This can also hinder a hospital from being competitive in the market and limit the patient’s choices for care (van de Ven & van Vliet, 1992).  I think that cream-skimming is an unethical practice because it can cause the patient harm. Intentionally manipulating patient access to care, refusing care, and deciding on what type of patients should be treated, can limit or deny a patient’s access to healthcare and can result in harm to the patient especially when they are severely ill or suffering from chronic diseases (Gillon, 1994). Beneficence and non-maleficence are ethical principles of healthcare that state that each patient should benefit from healthcare and not be treated in any way to cause harm (Gillon, 1994). These principles aim at keeping patients alive, not killing them (Gillon, 1994). The moral concepts are violated by causing harm to a patient and treating them unfairly, leading to poor health and even death (Gillon, 1994). Cream skimming can impact a patient’s health and health outcomes and therefore can be considered unethical.  

Data shows that Medicare paid 88.5 percent of hospital charges in 2014 and Medicaid paid 90 percent (Henderson, 2018). These payments are considered underpayments or low payments in comparison to payments from private insurances. This impacts the hospital’s budget because the organization loses revenue. After all, the reimbursement does not cover the full payment for the services and the patients cannot be billed for balances due to contract rules and government legislation (Henderson, 2018). If the hospital continues to meet the obligations to serve patients, meet the demand for services, and accept low payments from Medicare and Medicaid and without shifting the cost they can face financial problems (Henderson, 2018). It can be difficult to sustain financial stability. Non-profit organizations are mostly impacted by Medicare and Medicaid reimbursements because they are not only obligated to accept a low-paying contract for fee for services, but they also provide uncompensated and discounted services to the uninsured and the underinsured population (Henderson, 2018). Henderson states that for-profit hospitals are more competitive because they are not bound to the same obligations as non-profits and can charge higher fees and see only patients with insurances that pay in full for services (Henderson, 2018).


Friesner, D. L., & Rosenman, R. (2009). Do hospitals practice cream skimming? Health Services Management Research, 22(1), 39–49.

Gillon, R. (1994). Medical ethics: four principles plus attention to scope. BMJ, 309(6948), 184–184.

Henderson, J. (2018). Health Economics and Policy (7th ed.). Cengage Learning.

van de Ven, W. P. M. M., & van Vliet, R. C. J. A. (1992). How can we prevent cream skimming in a competitive health insurance market? Developments in Health Economics and Public Policy, 23–46.

Zwanziger, J., & Bamezai, A. (2006). Evidence Of Cost Shifting In California Hospitals. Health Affairs, 25(1), 197–203.

Post #2

Eric Staudter 

Cost shifting  is an economic circumstance in which a hospital or health care provider charges an insured patient more than it charges an uninsured patient for the same procedure or service (Healthcare Systems Engineering, 2012). This results in those with health insurance essentially paying for the financial loss that hospitals face when they provide services to those without insurance (2012). Despite high patient volume, many hospitals actually reported loss of revenue in emergency care and mental health departments. Due to this,  the costs associated with these departments may be shifted and shared throughout the hospital (2010). Essentially, hospitals that participate in cost shifting are attempting to reconcile the losses associated with Medicare, Medicaid, or uninsured patients to a break-even point. This practice influences the flow of money in the system by charging more in other circumstances to mitigate the financial losses.

The term cream skimming refers to the practice of engaging in choosing patients for care based on characteristics other than the need for care to increase profitability (Friesner & Rosenman, 2009). This practice operates on the guise that less ill patients will be more profitable to the healthcare organization giving care. The notion is that the healthcare organization will choose to treat less ill patients because the costs to provide care will be less than a severely ill patient. This seems unethical in healthcare. In my opinion, if someone is in need of care and has the means to pay for it, whether through insurance or out of pocket, they should be able to receive the treatment necessary. Unfortunately, it doesn’t seem like this is always going to be the case because the healthcare industry is an industry. Organizations have to generate revenue to stay open. If there is a Medicare/Medicaid patient, which organizations recognize as an opportunity to be reimbursed less, or a privately insured patient seeking the same treatments with similar “illness” level, the organization is probably going to choose to treat the private payer to maximize revenue from that treatment. If they do treat the Medicare/Medicaid patients, maybe we can observe further cost shifting to offset the financial losses of that treatment. 

States have the responsibility of setting up Medicaid payment rates for hospitals and providers (Cunningham et al., 2016). Medicaid reimbursements are historically below the actual cost of treatment which leads to payment shortfalls. For the organization, it is difficult to actually determine how much Medicaid pays because there is no publicly available data source that provides reliable information to measure this nationally across all hospitals (2016). If organizations are operating under the assumption that their budget will be negatively impacted by low public reimbursements, they will have to plan for ways in which they can offset any potential losses. This seems to be a place where organizations can debate on engaging in the practices of cost shifting or cream skimming.


Cunningham, P., Rudowitz, R., Young, K., Garfield, R., & Foutz, J. (2016, October 27). Understanding Medicaid Hospital payments and the impact of recent policy changes – ISSUE BRIEF. Retrieved April 05, 2021, from

Friesner, D. L., & Rosenman, R. (2009). Do hospitals practice cream skimming?. Health services management research, 22(1), 39–49.

The effects of Cost-Shifting in the U.S. health care system. (2012, September 17). Retrieved April 05, 2021, from

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