Volume, Goods Prices Behind Hospital Cost Increases

February 20, 2003 (PLANSPONSOR.com) - Hospital spending continued to rise from 1997 to 2001 behind an increase in patient volume and the rising costs of goods and services.

The higher patient volume accounted for 55.4% of the $83.6 billion increase in spending on hospital services during the period, while the remaining 44.6% growth was attributed to the costs to hospitals of providing patient care, according to the study, prepared by PricewaterhouseCoopers for the American Hospital Association and the Federation of American Hospitals.

The study, Cost of Caring:   Key Drivers of Growth in Spending on Health Care, said the 55.4% of growth was composed of population growth accounting for 21.0% and the usage of hospital services accounting for the remaining 34.4% of the increase.   The remaining 44.6% growth was due to increases in wages paid to hospital workers, higher prices in prescription drug and medical devices and liability insurance premiums.  

Overall, labor costs will account for the largest share of hospital spending increases from 2001 to 2003. Hospital reimbursement has not kept pace with rising costs, resulting in falling profit margins, the study found.

Notably, this increase in costs was moderated by an estimated 18.3% reduction attributed to efficiencies and other growth factors.   These factor held back spending growth by more than $15 billion.

Pricing Plateau

However, the growth in spending on hospital care is trending toward moderation.   This is evidenced by the growth in spending slowing from 8.3% in 2001 to 7.4% in 2002 and is forecast to be 5.5% in 2003.   Correspondingly, the share of the national health spending shouldered by the hospitals is estimated to decline from 31.7% in 2001 to 30.8% in 2003.  

Government forecasts predict the growth in spending on hospital services to hover around 6% through the next decade.   This forecast represents more an a percentage point below average growth in national health spending, expected to average 7.1%.  

The downward trend in hospital services as a share of national health spending is expected to continue uninterrupted until 2012.   From 31.7% seen in 2001, the share is expected to fall to 27.9% in 2012.   The 2012 share is expected to be more than one-third less than the peak share of 42.1% in 1982.