Hospital Costs Drive Medical Inflation

Published November 1, 2001

Pharmaceutical companies, it seems, are not the bad guys after all.

“Tracking Health Care Costs,” a new study published by the journal Health Affairs, puts things into proper perspective. According to the report, hospital costs outpaced prescription drugs as the biggest factor fueling health care spending in 2000.

The study was conducted by the Center for Studying Health System Change (HSC), a Washington-based policy research organization funded solely by the Robert Wood Johnson Foundation.

According to the study, health care costs increased 7.2 percent in 2000, the largest jump in a decade. Inpatient and outpatient hospital care expenses accounted for 47 percent of the increase.

Preliminary data for 2001 suggests spending in three key areas—inpatient care, outpatient care, and prescription drugs—continues to climb, while spending for physician services has remained flat.

Premium Increases Result

Rising health care costs in 2000 helped fuel premium increases for employer- sponsored coverage that averaged 11 percent in 2001, according to the study. HSC reasons consumer demand for broad networks of hospitals and physicians and the easing of restrictions by health plans, coupled with hospital consolidation and a reduction in excess capacity, have increased the bargaining clout of some hospitals vis-a-vis health plans.

“Hospital spending is back with a vengeance, and the likely causes are the retreat from tightly managed care, which has increased demand for hospital services, and rising labor costs,” said Paul B. Ginsburg, a study co-author and president of HSC, in a press release announcing the findings.

“The volatile combination of rising costs, increasing premiums, and a slowing economy have set the stage for consumers to pay more for care and an increase in the number of uninsured Americans,” Ginsburg said.

Among the study’s specific findings:

  • Spending for outpatient care increased 11.2 percent in 2000, up from an 8.9 percent increase in 1999.
  • Spending for inpatient care increased 2.8 percent in 2000, up from a 1.6 percent increase in 1999.
  • Spending for prescription drugs increased 14.5 percent in 2000, down from 18.4 percent in 1999.
  • Spending increases for physician services slowed to 4.8 percent in 2000, compared with a 5.8 percent increase in 1999.

Demand-Driven Increases?

The hospital industry says rising costs simply reflect rising demand. According to a news report in USA Today, Carmela Coyle of the American Hospital Association explained, “The driving factor is Americans are using more hospital services.”

But health insurance companies say hospitals negotiating for money, not simply consumer demand, fueled the increases. In a statement to the press responding to the study, Karen Ignani, of the American Association of Health Plans, noted, “Our member plans are experiencing requests from providers for substantial increases in reimbursement.”

For more information . . .

“Tracking Health Care Costs: Hospitals Surpass Drugs as Key Cost Driver,” is available on the Internet in both HTML and Adobe Acrobat’s PDF file format. Point your Web browser to or, respectively.