Better Solutions for Healthcare

Modern Healthcare: Hospital price growth driving healthcare spending

By Alex Kacik

February 4, 2019

Hospital prices are the main driver of U.S. healthcare spending inflation, and that trend should direct any policy changes going forward, according to a new study.

For inpatient care, hospital prices grew 42% from 2007 to 2014 while physician prices rose 18%, according to researchers who studied the Health Care Cost Institute’s claims data for people with employer-sponsored insurance from Aetna, Humana and UnitedHealthcare Group. Similarly, for hospital-based outpatient care, hospital prices increased 25% while physician prices grew 6%, the new Health Affairs study found.

Insurance costs a family of four about $19,000 a year. The reason costs vary so much across the country is because of the price of hospital care, which is the largest single component of healthcare costs in the U.S., said Zack Cooper, a study co-author and an associate professor of health policy at Yale University.

“What is most worrying to me is that there has been fairly profound consolidation among hospitals and when they gain market power they have the ability to raise prices,” he said. “They have the ability to gain more favorable contractual terms, which allows them to raise prices and resist the new, more sensible payment reforms.”

The U.S. healthcare economy is nearly as big as Germany’s entire economy. U.S. healthcare spending grew 3.9% to $3.5 trillion in 2017, consuming nearly 18% of the country’s gross domestic product, according to the CMS.

Higher healthcare spending limits economic growth. It stunts wages, produces higher out-of-pocket costs that dent disposable income and boosts federal subsidies for insurance bought through the Affordable Care Act exchanges.

About 33% of total healthcare spending is directed toward hospital care, translating to about 6% of total GDP, according to CMS data.

“If you look over the last 20 to 30 years, total employee compensation has gone up, but the amount each worker gets paid has been incredibly flat,” Cooper said. “The gains they would’ve gotten in income have gone toward paying their insurance and the largest chunk of that goes toward paying their local hospital.”

Healthcare inflation in the U.S. is projected to grow by an average of 5.5% annually from 2017 to 2026, ultimately reaching $5.7 trillion by 2026, the CMS estimates.

The common narrative is that growth in healthcare providers’ prices plays a larger role in driving growth in health spending on the privately insured than any change in case-mix or utilization. But to the researchers’ knowledge, this is the first analysis that systematically compared growth rates of hospital versus physician prices.

Researchers analyzed the pricing of four different hospital procedures—cesarean sections, vaginal deliveries, colonoscopies and knee replacements. The hospital component of the combined cost of care—physician plus hospital prices—ranged from 61% for vaginal deliveries to 84% for knee replacements.