Could U.S. hospitals go the way of U.S. airlines?

The market for hospital services, like global markets in general, is becoming more competitive. Increased price transparency and focused competition can squeeze out inefficiencies, restraining prices and making some consumers better off. But competition can have a dark side. U.S. hospitals can treat Medicare and Medicaid patients at less than cost, care for the uninsured, and provide other money-losing services because they can cross-subsidize. By 2025 the need for general hospitals to cross-subsidize will greatly in-crease, but their ability to do so will be diminished. U.S. hospitals could begin to resemble U.S. airlines: severely cutting costs, eliminating services, and suffering financial instability.

The precarious pricing system for hospital services.

Over the past twenty-five years, the average ratio of hospital charges for services (gross revenues) to payments received (net revenues) has grown from 1.1 to 2.6. This reflects a transition from predominantly cost- and charge-based payment systems to regulated and negotiated fixed payments. Hospitals have been able to squeeze additional revenues from remaining charge-based payers and services by sharply increasing charges, negatively affecting the uninsured. Although protection of the uninsured seems warranted, it might be difficult to regulate hospital pricing systems in isolation from other controversial issues, such as the acceptability of cross-subsidies and the role of market forces.

The outlook for hospital spending.

Hospital use and spending greatly increased in 2001 and 2002, reversing a long-term trend. In this paper we contend that the forces driving current hospital expenditures are more likely to continue than they are to abate. If current trends continue, real hospital spending per capita will increase 75 percent between 2002 and 2012, and the demand for hospital beds will increase considerably. We discuss numerous forces that will contribute to spending growth, including technology, which is likely to continue to raise costs. We also find that hospital spending by baby boomers grew more rapidly than that of the elderly, a change in trend that could presage increased spending as this cohort moves into higher-spending age groups.

Escalating health care spending: is it desirable or inevitable?

This study analyzes changing trends in U.S. health spending and concludes that although the long-term growth trend has been a good predictor of future spending, periodic differences in the growth trend are important. Of particular concern is the rapid acceleration in health spending beginning in 1998. If left unchecked, the current growth rate will result in almost 24 percent of GDP spent on health by 2011. The authors question whether such unconstrained spending levels are either desirable or inevitable, and they offer a guide to how the United States might develop a long-term cost-containment strategy that is both effective and sustainable.