Consolidations and profiteering: the relentless rise of hospital expenditures
What is driving hospital expenditures higher and higher?
Amidst all the talk of rising health-care costs and profiteering by drug and insurance companies, particularly managed-care firms, the hospital industry remains relatively unexamined by the mainstream media.
This has finally begun to change with recent news of hospital closures, garnishing wages and foisting debt collectors on non-paying patients. But overall, hospitals — which comprise the single largest component of health-care expenditures in the country, accounting for one out of every three health-care dollars — remain relatively unscathed by public opinion.
The Centers for Medicare and Medicaid Services (CMS), which track annual health-care costs and project them into the future, reported that hospital expenditures were $1.2 trillion in 2019 and will reach $2.2 trillion in 2030. But if hospital expenditures were to grow at the same rate as the economy (GDP) during this time period, the total would be nearly $2 trillion ($1.96T) lower between 2019 and 2030 according to CMS’s own estimates.
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What is driving hospital expenditures higher and higher? There are many contributing factors. These include the dizzying array of wasteful administrative costs embedded in our multi-payer (and multi-price) insurance system. Studies estimate that administrative costs amount to 15-30% of total health-care spending, and that hospitals in conjunction with our polyglot insurance system account for the bulk of that.
Upcoding diagnoses (adding additional diagnosis codes on patient records to garner higher reimbursement) adds billions to the health-care tab. A recent report by the Medicare Payment Advisory Commission (MedPAC), an independent advisory agency established by Congress, found that between 2007 and 2023, coding intensity, i.e. upcoding, generated nearly $124 billion in excess payments to Medicare Advantage plans.
Overpriced pharmaceuticals also add to hospitals’ bottom line. A recent study found that hospital prices for the top 37 infused cancer drugs averaged 86.2% higher per unit than in physician offices. However, perhaps the single largest driver of rising expenditures has been hospital consolidation through mergers and acquisitions. By 2018, over 95% of metropolitan areas had highly concentrated hospital markets. Moreover, concentrated markets are associated with higher hospital prices — with price increases often exceeding 20% when mergers occur — despite little evidence of quality improvements.
While we must pay closer attention to hospitals’ role in rising health expenditures, it is the entire health-care system that requires radical transformation because it is working (as designed) to extract private profits (called “surplus'' in the case of nonprofit hospitals). As Don Berwick recently wrote in JAMA, “…kleptocapitalist behaviors that raise prices, salaries, market power, and government payment to extreme levels hurt patients and families, vulnerable institutions, governmental programs, small and large businesses, and workforce morale.”
Peter S. Arno, PhD, is an economist and Senior Fellow and Director of Health Policy Research at the Political Economy Research Institute at the University of Massachusetts-Amherst and a Senior Fellow at the National Academy of Social Insurance. Dr. Arno received his doctorate in economics at the New School for Social Research and was a Pew Postdoctoral Research Fellow at the Institute for Health Policy Studies and the Institute for Health and Aging at UCSF, a Scholar of the American Foundation for AIDS Research and the recipient of the Robert Wood Johnson Investigator Award in Health Policy. Recently, Dr. Arno’s recent work has focused on regulation and pricing practices of the pharmaceutical industry and economic analyses of universal health care proposals for the US, California and New York. His 1992 book with Karyn Feiden, “Against the Odds: The Story of AIDS Drug Development, Politics & Profits,” was nominated for a Pulitzer Prize.
This is the first time I disagreed with an article- clearly the author has never operated a hospital. Clearly hospitals are NOT efficient and have a lot of work to do but the author fails to mention that 20% of hospital patients are covered by Medicaid that pays 65 cents per dollar of cost and 35% of patients are Medicare that pays about 80 cents per dollar of cost. Much of the crazy mark-ups referred to in the article are the result of the need to subsidize underfunded government patients as well as 'self pay' patients not to mention the unilateral decision by the payers to stop providing first dollar coverage and turning providers into debt collectors. Over-simplifying the complexities of hospital economics ultimately hurts patients because we do not get to the root causes of the problems -