Rising hospital prices driven by increasing costs of care

There are a number of reasons why hospital prices throughout the U.S. are rising, and a study published online Oct. 1 in Health Management, Policy and Innovation found that most of them relate to cost of care increases. There is little evidence to suggest that market competition is behind the higher prices or that hospitals hike up prices because of lower reimbursement from insurance companies.

Using hospital data from 319 hospitals in Texas from 2000 through 2007, researchers analyzed revenues and price by payer type as well as costs incurred and charges.

Average total revenue in 2000 was $62.9 million and costs were $62.5 million. In 2007, average revenue and costs grew to $78.2 million and $74.8 million respectively. Prices for privately insured patients were considerably higher than average costs, and they increased significantly more than costs (53 percent vs. 38.4 percent). Average reimbursement from Medicare and Medicaid was much lower than the costs incurred for these patients.

The authors, led by Vivian Ho, PhD, of Rice University Baker Institute for Public Policy in Houston, argued that there could be several reasons for these cost trends. “[W]e found that at least two-thirds of the price increase that occurred between 2000 and 2007 can be explained by the higher costs of caring for these patients,” the authors wrote.

The costs, they continued, are likely due to the use of advanced technology, which is considered to be a major factor in the growth of healthcare costs.

In addition, patients admitted to Texas hospitals became more seriously ill between 2000 and 2007, accounting for 3.6 percent of the overall increase in private pay prices. More outpatient care and more freestanding facilities available to less severely ill patients also contributed to the higher private pay prices.

They found no evidence that lower Medicare or Medicaid reimbursement was associated with higher private pay prices. They did find that a 1 percent decrease in uninsured or self-pay prices was associated with a 0.03 percent increase in private pay prices. Average revenue for each uninsured or self-pay patient increased 19 percent, meaning that the changing price trends were not the result of costs shifting from uninsured or self-pay patients.

They also found no evidence that market competition, changing to for-profit status or managed care penetration rates led to higher private pay prices.

There is a common belief that the increasing number of uninsured patients leads to higher private pay prices, and this “misconception has distracted policy makers and workers in the health care sector from identifying effective strategies for cost control. The results of this study suggest that more attention should be paid to understanding the cost drivers of hospital care.”