Medicare and Medicaid set their payment rates for medical services above marginal cost, but below average total cost. One major consequence of doing this is that hospitals and other providers are then

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When Medicare and Medicaid set their payment rates below average total cost, hospitals and providers may not be able to cover all their costs. To make up for the shortfall, they may pass on the uncovered costs to patients with private health insurance. This phenomenon is called cost-shifting. As a result, patients with private health insurance end up paying more for their care to subsidize the shortfall caused by the lower payment rates of Medicare and Medicaid.

Medicare and Medicaid Set Their Payment Rates for Medical Services