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Hospital Spending Driven by Increases in Service Use, Care Costs

Kate Traynor

Findings from a survey (PDF) released this month indicate that the cost of caring for hospitalized patients has grown substantially in recent years as more patients have sought care and the costs of providing it have grown.

According to the results of the survey, which was commissioned by the American Hospital Association and the Federation of American Hospitals, spending on hospital-based care grew by $83.6 billion from 1997 to 2001. About 55 percent of this total was attributed to an increased demand for hospital services. The remainder of the increase represents money spent by hospitals to purchase goods and services, with 39 percent of this amount representing wages and benefits for hospital workers.

A report describing the survey findings noted that wage increases for hospital workers nearly tripled between 1997 and 2001—offsetting a trend in the early 1990s, when hospital workers’ pay lagged behind salaries offered by private industry. The report noted that 63 percent of hospitals' labor costs goes for maintaining an adequate nursing staff, with pay for these professionals increasing in response to a national shortage of nurses.

Although hiring and retaining nurses is described as hospitals’ main labor-related concern, the report stated that national shortages of pharmacists, medical coders, and radiology technicians also cause problems for hospitals.

Despite the increased demand for hospital services, the report found that overall spending on hospital care constitutes a shrinking portion of total national health care expenditures. Hospital care accounted for 36 percent of national health care expenses in 1990 but 32 percent in 2001.

National spending on hospital services increased by 61 percent from 1991 to 2001, according to the report. During the same 10 years, spending for costs associated with administration, overhead, and profits for private health plans more than doubled, and spending on prescription drugs more than tripled. National spending on nursing home, home health care, clinical, and physician services increased by about 80 percent.

A number of fairly recent developments may be affecting hospitals’ financial health. Examples cited in the report include:

The need to update information technology systems. Purchases of computerized prescriber order-entry systems and programs incorporating machine-readable codes are expected to offer savings in the long run, but initial implementation costs are high.

Implementation of ambulatory patient classifications (APCs). The government's switch to the hospital outpatient prospective-pricing system and associated APCs for services provided to Medicare beneficiaries is credited in the report as contributing to unknown but significant administrative costs. The report noted that the Centers for Medicare & Medicaid Services has distributed hundreds of notices changing the APCs, with some changes applying retroactively.

Enforcement of Health Insurance Portability and Accountability Act of 1996 (HIPAA). The costs for complying with the various HIPAA regulations are described in the report as difficult to measure. Hospitals' compliance with HIPAA, according to the report, will likely produce savings in the long run but contribute to increased spending on personnel, consulting services, and information technology.

The report noted that increased hospital expenses were partially offset by an 18 percent savings achieved through increased efficiencies—a savings that amounted to about $15 billion from 1997 to 2001. But efficiency-related savings are predicted to decrease to about 5 percent of hospital expenses this year. According to the report, the pressure on hospitals to increase efficiency has put significant stress on health care workers and added to recruitment and retention difficulties.

Data for the report were obtained by PricewaterhouseCoopers from various public and private sources and from interviews with hospital executives.