NCPA - National Center for Policy Analysis

Hospital Spending Drives U.S. Health Cost Increases

October 1, 2001

Hospital spending has overtaken drug costs as the leading driver of health inflation in the U.S., according to a new study. Hospital spending is increasing at a rate not seen since the early 1990s, due to a combination of looser restrictions by managed care plans that have increased utilization, rising labor costs due to the nursing shortage, and increases in payments from insurance companies to hospitals, according to a report from the Center for Studying Health System Change.

  • Hospital spending increased in 2000 around 2.8 percent on the inpatient side and 11.2 percent for outpatient care. o Together, both accounted for 47 percent of the overall increase in health spending.
  • By comparison, 27 percent of the increase is attributable to more spending on drugs.
  • Spending on physician services increased by 4.8 percent, accounting for 25 percent of the total.

The overall health inflation rate of 7.2 percent in 2000 is the largest increase in a decade. According to the study, the lagging economy means that employers are far less likely to absorb the premium increases.

A major reason for the slowdown in drug spending -- costs rose 14.5 percent in 2000, compared with 18.4 percent the previous year -- has been the move toward "tiered" pricing structures, in which consumers pay more out-of-pocket for more expensive drugs. The combination of higher growth in health care costs, through its effect on premiums, and a slowing economy threaten a major increase in the number of people who are uninsured.

Source: Bradley C. Strunk, Paul B. Ginsburg and Jon R. Gabel, "Tracking Health Care Costs," Health Affairs, September & October, 2001; "Hospital Spending Drives US Health Cost Increases," Reuters Health, September 26, 2001.


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