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November 1, 2001

Study: Increasing hospital costs drove record jump in health costs in 2000

Health-care costs increased 7.2 percent in 2000, the largest increase in a decade, and increases in hospital spending accounted for the largest share of that jump, a new study by the Center for Studying Health System Change has concluded.

The results of the study were published Sept. 26 on HealthAffairs.org.

Inpatient and outpatient hospital care account for nearly half, or 43 percent, of the overall increase, according to the study, "Tracking Health Care Costs."

"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, Ph.D., a study co-author and president of HSC, a nonpartisan policy research organization funded solely by The Robert Wood Johnson Foundation.

Increasing medical costs in 2000 helped fuel an average 11 percent premium increase for employer-sponsored coverage in 2001, the report said. Consumer demand for broad networks of hospitals and physicians and health plans' easing of care restrictions, coupled with hospital consolidation and reduction in excess capacity, have increased some hospitals' bargaining clout with health plans.

"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.

In 2000, health-care spending reflected significant shifts in the underlying components driving higher costs:

Early information about 2001 costs indicates spending for inpatient and outpatient hospital care and prescription drugs is continuing to climb, while spending for physician services has remained flat.

Insured consumers largely have been sheltered from cost increases in recent years because employers have paid a disproportionate share of premium increases. But the slowing economy and sagging corporate profits signal a likely change in employers' willingness to continue absorbing increased costs. Employers already have increased patient cost sharing for pharmaceuticals and are expected to do the same for hospital and physician services. (To read a related story, visit bcnys.org/whatsnew/2001/1025hii.htm.)

The report said an analysis of health services payroll costs indicates that payroll growth is a key driver of overall health care costs. Perhaps because of nursing and other staff shortages, payroll costs for all health services, including hospitals, increased 4.7 percent in 2000 compared to 3.1 percent in 1999. Hospital payroll costs increased 3.7 percent in 2000 compared to 2.6 percent in 1999.

Through May 2001, payroll costs were significantly higher compared to the same period in 2000, rising 7 percent for all health services and 7.6 percent for hospitals. Also, during the first five months of 2001, average hourly wage growth increased sharply, particularly for hospitals, again likely reflecting labor shortages.

"In contrast to the last time cost trends were this high-in the early 1990s-the cost-containment strategies of managed care are now in retreat, leaving employers few ways to stem the rising cost tide except to shift costs to workers or reduce benefits," Ginsburg said.