Issue No.19: Focus on Where the Spending Is: Hospitals

Pharmaceuticals are often portrayed by politicians and the media as the main drivers of health-care costs. When we look at the relative share of spending, however, we find that hospitals are the largest category, by far. According tonew data from the Altarum Institute, annual hospital expenditures totaled $1.133 trillion through June. That compares with $708 billion for physician and clinical spending and $359 billion for prescription drugs.

Another way of measuring this spending is against gross domestic product. Hospital costs are 5.9% of GDP; physician and clinical, 3.7%; pharmaceuticals, 1.9%.

If policy makers really want to try to control health-care spending, they should focus where the money is: America’s 5,564 hospitals, most of which are non-profits. The hospital sector seems to offer excellent opportunities for cutting or restraining overall health-care costs – especially considering that the key metrics for hospital use are dropping. Still, lowering costs won’t be easy. The place to begin is a nuanced, careful discussion of how American spends its hospital dollars.

More for Less

In late June, H-CUP, the Healthcare Cost and Utilization Project, a federal-state-industry partnership, issued a report titled, “Trends in Hospital Inpatient Stays in the United States, 2005-2014.” The results are shocking. While the U.S. population has been rising – and the population of seniors has been rising even more – inpatient hospital stays have been falling, from 38.2 million in 2010 to 35.4 million in 2014 (the most recent year for these data). Surgical inpatient stays dropped from 8.1 million in 2008 to 7 million in 2014, a 12.5% decline in just six years.

This trend applies to both men and women and cuts across all age groups. For example, the Centers for Disease Control reports that between 1975 and 2015, the proportion of women aged 45 to 64 who had at least one hospital stay in the past 12 months fell from 12% to 8%.

The H-CUP study found that, between 2005 and 2014, total hospital stays declined 6.6%, but the average (mean) cost per stay, adjusted for inflation rose a total of 12.7%. The cost of a maternal (childbirth) hospital stay rose 12.8% (again, adjusted for inflation); neonatal stay, 19.2%; surgical, 16.4%; injury, 17.1%.

Inflation during the 2005-2014 period totaled 19.3%, so, in terms of actual dollars paid out, hospital costs rose by about one-third in less than a decade.

A Quiet Revolution

A combination of factors is reducing hospital stays. For example, better medicines to treat high cholesterol and blood pressure mean fewer people are suffering crippling heart disease. The H-CUP study found that over the nine years “the number of stays for coronary atherosclerosis and other heart disease decreased by 63 percent (from 1,076,100 to 397,000)… Stays for congestive heart failure decreased by 14.4 percent (from 1,053,100 to 901,400).”

The report also points to “growing efforts to reduce unnecessary hospitalizations, greater use of chronic disease management programs, and a shift toward outpatient treatment.”

The CDC refers to changes in Medicare, which “implemented a prospective payment system for hospital care which paid a flat rate per case based on diagnosis rather than reimbursing costs.” In other words, hospitals had less financial incentive to put patients in beds and keep them there. Also, says the CDC, “technological innovations have reduced recovery times and allowed some formerly hospital inpatient procedures, such as laparoscopic surgery and cataract removal, to take place in outpatient settings.”

Becker’s Hospital Review, a trade publication, reports that “there was an average of 2,174 outpatient visits per 1,000 people in 2014, up from an average of 2,000 visits in 2007, supporting the trend of inpatient surgeries moving to the outpatient setting.”

The results are nothing short of a quiet revolution. From 1990 to 2014, says Becker’s, the average length of a hospital stay fell from nine days to just five. Those five days, however, aren’t cheap. The average cost for an inpatient stay(not counting procedures such as surgery) at a non-profit hospital during a period that long is about $12,000.

The CDC reports that, from 1975 and 2014, the number of hospital beds at community hospitals (which account for 85% of all U.S. hospitals) fell from 4.6 per 1,000 population to just 2.5. The occupancy rate for those fewer hospital beds declined from 75% to 63%. Emergency room visits are also falling, a decline that began even before the Affordable Care Act was implemented.

In addition, the total number of U.S. hospitals dropped from 7,156 to 5,627 from 1975 to 2014, a period when U.S. population rose by 100 million.

Resolving the Paradox

But, again, if demand for hospital beds is declining, why are costs rising? On page 316 of that same CDC document that shows a shrinkage of hospitals and overnight stays, it’s reported that hospital spending rose from $50 billion in 1975 to $981 billion in 2014. Inflation alone can’t explain that near-20-fold increase.

There is no single answer for exploding expenditures. One factor, certainly, is a health-care reimbursement system that has grown more and more complicated. As The Economist magazine reported in its Aug. 12 issue:

That complexity contributes to costs. America spends vastly more on administration [than Europe]: 8% of health spending versus 2.5% in Britain. As of 2013, Duke University hospital had 400 more billing clerks (1,300) than hospital beds (900).

These bookkeeping entanglements also affect physician efficiency. A time-and-motion study published last year in Annals of Internal Medicine found:

For every hour physicians provide direct clinical face time to patients, nearly 2 additional hours is spent on EHR and desk work within the clinic day. Outside office hours, physicians spend another 1 to 2 hours of personal time each night doing additional computer and other clerical work.
 
Another factor is the increase in overall labor costs. Despite fewer hospitals and fewer beds, employment at hospitals rose from 4.5 million in May 2007 to 5.1 million seven years later, according to the Bureau of Labor Statistics – an increase of 13%. By contrast, total U.S. employment during this period rose just 4%. Salaries and other labor costs are also rising. For example, Cleveland Clinic, the 13th largest hospital in America, last year spent $4.5 billion on “salaries, wages and benefits,” or 63% of its total expenses. Compensation costs there rose 13% in a single year.

Research by Michael Mandel, published May 28 with data from the Bureau of Economic Analysis, found that rising labor costs – mainly associated with hospitals -- accounted for 44% of the increase in health care spending last year. “All told,” wrote Mandel, chief economic strategist of the Progressive Policy Institute, “the increase in labor compensation for health care workers is 4x the increase in net spending on pharmaceuticals.”

Yet another reason for increased costs is consolidation. Between 2011 and 2015, the number of physician practices owned by hospitals increased 86%. Four out of 10 physicians are now employed by hospitals. Both physicians and hospitals are responding to economic incentives. For example, as the publication Medical Economics reported last year: “Medicare pays more for the same services delivered in the hospital outpatient setting versus the physician office setting.”

A study published in Health Affairs in 2014 found “that an increase in the market share of hospitals with the tightest vertically integrated relationship with physicians--ownership of physician practices--was associated with higher hospital prices and spending.”

In testimony before a California state legislative committee last year, Paul Ginsburg, an economist with the Brookings Institution, concluded: "Health care markets are becoming more consolidated, causing price increases for purchasers of health services, and this trend will continue for the foreseeable future despite anti-trust enforcement.”

There is no simple answer to the paradox of hospital costs, but it is clear that the best minds in America should be focused on it. According to the Centers for Disease Control, between 2000 and 2015, annual spending on health care rose by about $1.8 trillion. Two-thirds of that increase came from three parts of the system. Spending on…

• hospital services rose by $620;
• physician and clinical services, by $346 billion;
• pharmaceuticals, $204 billion.

If you wanted to solve the problem of rising costs, where would you look first? The answer jumps out – especially when you realize that people are spending less and less time in hospitals having surgery or lying on their backs recovering.