Hospitals Driving Inflation
No Band Aid for Inflation
By Rakesh Shankar
08/07/01 8:00 AM ET
Medical care price inflation, particularly hospital price inflation, is outpacing overall inflation, and is expected to keep escalating at a faster rate over the next year.
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The recondite factor driving health care price inflation is not rising drug prices, as is so facilely bandied about in the media, but soaring hospital prices. Prescription drug prices comprise a mere 14% of overall medical CPI, as opposed to the 22% share held by hospitals. But more importantly, while drug price increases are running at approximately one to one-and-one-half percentage points over the CPI, hospital price increases have been rising at nearly twice the pace of inflation.
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Hospital prices are thus driving the current rapid escalation in medical inflation. Cost side pressures have caused much of the growth in hospital CPI over the past year, and will continue to affect them in the near term.
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One of biggest factors pushing hospital price inflation is the increased utilization of hospital services. Health service utilization (hospitals, nursing homes, etc.) had been dipping due to controls implemented by managed care through the 1990s. However, a general increase in consumer frustration with such restrictions has led to an expansion of managed care plans that offer customers greater choice. But these plans, typically offered under such names as Preferred Provider Organizations (PPO) and Point of Service (POS), tend to drive up demand for, and hence utilization of, health services.
Hospital services are inelastic relative both to prices and to overall economic growth. The trend of the consumption of hospital services is not strongly correlated with overall consumption trends, as shown in the chart. Even as the growth in the national economy slows dramatically, utilization of hospital services is still rising, putting continued pressure on health care prices.
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Hospitals are also being buffeted by high labor costs, thanks largely to a nursing shortage in the industry. A myriad of factors, from low pay to high stress work to general dissatisfaction with the healthcare profession, has encouraged more nurses to leave the profession entirely, and has dried up enrollment in nursing schools. The nursing crunch has sent labor costs rocketing for hospitals, where nearly 50% of costs are taken up by labor. The easing in the broader labor market will do little to ease rising hospital labor costs as hospitals require specialized labor that is not easily substitutable. Alarmingly low unemployment rates among hospital workers is evidence of the extremely tight hospital labor market.
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Hospitals are also facing rising costs for prescription drugs, medical supplies, and medical technology. These cost increases are, in turn, being passed on to users.
Finally, health service providers are also being hit by higher costs for implementation of technology-intensive privacy and quality solutions. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) was originally designed to require all players in the healthcare arena to adopt standardized methods of transmitting patient information, to ensure easy and efficient information transfers between various players. While this will no doubt force most hospitals to adapt efficient new technology, the capital investment required to be fully compliant with the regulations will be a drain on hospital finances, especially so close after the nation's hospitals invested a collective $8 billion to ensure Y2K compliance.
Since most of the factors driving hospital costs are structural rather than cyclical factors, hospital price are expected to continue accelerating in the near term. These rising prices will affect corporate bottomlines as health insurers raise premiums to meet rising hospital costs. So consumers can expected to be pinched both by higher hospital bills and rising insurance premiums. Federal and state government spending on hospital care is also likely to escalate as utilization and the price of hospital care rises in the near term, placing further burden on already-tight fiscal conditions. |
