Skip to main content
The Keckley Report

After Drug Prices, The Next Target is Hospitals. Is it a Fair Fight?

By February 19, 2019March 1st, 2023No Comments

Two studies released this month point to the same conclusion: increasing health costs are the result of the prices we pay for what we get, regardless of how much we use. Both point to hospitals as a major culprit.

The Health Cost Containment Institute analyzed claims data for 40 million individuals under 65 from 2007 to 2014 using prices actually paid for the services provided. The research team wrote:

“Evidence suggests that growth in providers’ prices drives growth in health care spending on the privately insured… We found that in the period 2007 to 2014, hospital prices grew substantially faster than physician prices. For inpatient care, hospital prices grew 42%, while physician prices grew 18%. Similarly, for hospital-based outpatient care, hospital prices grew 25%, while physician prices grew 6%. A majority of the growth in payments for inpatient and hospital-based outpatient care was driven by growth in hospital prices, not physician prices.”

The Urban Institute researchers analyzed CMS data for a 12-year period (2006 to 2017) to compare spending by Medicare, Medicare and private purchasers. They found growth in spending per enrollee in Medicare (+2.4%) and Medicaid (+1.6%) was much slower than in private insurance (+4.4%). On an aggregate spending basis, annual spending growth for Medicare (+5.2%) and Medicaid (+6.0%) exceeded growth in private spending (+4.4%) due to faster enrollment: average annual enrollment. In Medicare, spending growth was attributable to prescription drugs (29%), physician services (22%) and hospitals (21%). In Medicaid, physician services (26%), administrative overhead (25%) and hospitals (22%) were most responsible. And in the private market, hospitals (49%), physicians (21%) and administrative costs (10%). In 2017 hospital spending accounted for 40% of total Medicare spending, 33% of Medicaid spending and 39% of private spending—the highest category for all three.


  • Total healthcare spending growth is a result of higher prices for what’s used rather than higher unnecessary utilization.

  • Medicaid and Medicare pay less for what’s used by their populations while the privately insured population pays more.

  • Hospital spending increases—what’s actually spent for what’s used—is more responsible for spending increases than spending for physicians, prescription drugs and long-term care.

This is not breaking news to hospitals. It’s part of the larger story of health cost containment they’ve faced for decades. Since 1960, national health expenditures have exceeded the nation’s gross domestic output every year except 2010-2013 as the economy recovered from the 2007 recession. Since 2013, spending on healthcare has increased 4.9% while our gross domestic product has grown 3.8%. Forecasts are for healthcare spending to increase 5.5% for the next decade, growing from 17.9% to 19.7% of the GDP (CMS Office of the Actuary). That assures hospital spending will be targeted for cost containment efforts across the board.

Currently, drug prices, 10% of total spending, are the target. Reducing drug costs was a pledge of the Trump administration and draws rare bipartisan support. The US Department of Health and Human Services, the Food and Drug Administration and other federal agencies have advanced proposed regulations mandating price transparency, limiting TV ads, increased competition by generics, the elimination of rebates, lifting of gag orders on pharmacists, and more. And Democratic candidates for the White House in 2020 are calling for direct importation of drugs from Canada, allowing Medicare to purchase drugs directly from manufacturers, and giving states more latitude in price controls legislation. Reducing drug prices is popular. But according to the studies above, hospital spending is actually more responsible for increased health costs than drug prices.


Hospitals represent 33% of total health spending—the largest single category of spending. In 2017, hospital expenditures grew 4.6% to $1,142.6 billion, slower than their 5.6% growth in 2016. Physician and clinical services expenditures grew 4.2% to $694.3 billion vs. 5.6% increase in 2016 and prescription drug spending increased 0.4% to $333.4 billion vs. 2.3% growth the year before. So, it’s not surprising that hospitals are targets, especially among employers, private insurers and large numbers of working age adults whose insurance includes a high deductible feature.

Is the growing disdain about hospital costs justified? These are the facts:

Critics of hospital spending are justified in asserting that:

  • Hospital prices and their underlying costs are wildly variable from market to market and do not correlate with patient outcomes. Higher costs and prices do not mean better care. Rather, they correlate with a hospital’s location, local competition and its mix of patients.

  • Unlike other industries, charges posted by hospitals are relatively meaningless: net collected revenue based on negotiated discounts with payers is their measure of solvency and liquidity. The irony with net revenue is that it’s considered a top line number on the P&L. Critics think the requirement that hospitals post their chargemasters in a “machine readable format” will have no impact on price transparency for consumers. Case in point- some (not all) specialists have shifted their entire strategy to bill at out of network rates exclusively, allowing contracted hospitals to benefit from these higher gross charges as payments flow back through.

  • Administrative cost escalation in hospitals is a major contributor to the issue: since the 1960s, they’ve increased at three times the rate of inflation. They’re 25% of hospital budgets.

  • The productivity of the hospital workforce lags other industries: per the Bureau of Labor Statistics, it’s been a persistent issue for decades.

  • Hospital prices and their underlying costs are not readily available to patients or payers. Hospital price transparency is more aspirational than real.

  • Hospital consolidation has not resulted in lower hospital costs.

  • Keeping a hospital afloat because it is a major employer in a community is without merit. It fuels unnecessary costs and compromises the quality and effectiveness of care. Demand alone should be the basis for a hospital’s services.

Defenders rightly point out that:

  • Hospitals are required by law to provide services to anyone regardless of their ability to pay. Nearly all bad debt originates in the E.R. where patients cannot be turned away.

  • Not-for-profit hospitals are required to provide services that benefit communities for which they’re not reimbursed, and for-profit hospitals pay taxes.

  • Most hospitals lose money for the services provided to Medicare enrollees, almost all lose money for services provided to Medicaid enrollees and all barely breakeven on the privately insured.

  • Hospita spending includes costs for drugs, technologies and devices that have increased faster than inflation and overall GDP growth. Many of these enjoy near-monopoly pricing power.

  • Hospital spending is influenced heavily by the treatment patterns of physicians who are not inclined to consider costs and prices in their practices.

  • Privately-financed competitors are cherry-picking services that reward their investors leaving hospitals to provide services for the under-insured and those lacking coverage. Micro-hospitals, urgent-care clinics, primary care gatekeeper models promise savings primarily by reduced use of hospitals.

  • Cost reduction is a high priority in every hospital since reimbursements are shrinking.

And both acknowledge that the role of hospitals is changing: the shift from fee for service reimbursement to alternative payment models and diversification of services to address chronic and senior are populations are seismic changes that often meet resistance from physicians who specialize in inpatient care.


It’s clear the spotlight on hospital prices and underlying costs will intensify. That means hospital boards and C suites must step up efforts in three areas:

  • Cost containment: Every hospital says it’s reducing operating costs. Some go beyond low hanging fruit: they re-design how care is delivered where and by whom. They off-load non-productive uses of capital and leverage technology to reduce labor costs. They lower administrative costs and outsource where possible. Per Huron, a major performance improvement consultancy, average annual improvement in revenue cycle management (3% to 6%), operating expenses (5% to 10%) and clinical care optimization (4% to 8%) are achievable. To be credible to the market and effective with legislators, hospitals MUST show demonstrable cost reduction results.

  • Advocacy: Cuts to Medicare payments are a key part of the administration’s strategy to lower budget deficits. In tandem, they wish to grant wider latitude to states like block grants for Medicaid, allowing states to impose work requirements on Medicaid enrollees and others. And federal efforts to lower drug costs are still promises: their impact on hospital supply chain costs is to be determined. Therefore, hospitals must step up advocacy efforts at the federal and state levels: elected officials inadequately informed about hospital issues

  • Growth: The array of new players wishing to disrupt the conventional role played by hospitals feature organizations with deep pockets. The market capitalization of Amazon ($1.6 trillion), Apple ($170 billion), Optum ($271 billion), CVS ($69 billion) and resources invested by private equity in start-ups whose business model is focused on cherry-picking hospitals should be on every hospital’s radar. Access to capital, an aggressive growth plan, a willingness to use technology in lieu of staffing and cultures that take no prisoners are common to these organizations. And the market—particularly employers, Millennials and young Baby Boomers are receptive.

In many ways, it’s not a fair fight: no other sector in healthcare is subject to the enormity of regulatory scrutiny hospitals face. No other sector is expected to operate 24/7, maintain the latest technology, assume financial risks and be penalized if results are sub optimal. But that’s no excuse for highly variable costs and marginally accessible prices. It’s a new day for hospitals. 

Attention to the role hospitals play in overall health spending will intensify in coming days. Boards and management must be prepared to address the issue head on. It’s not going away.



PS At HIMSS, the annual showcase for health information technology, in Orlando last week, CMS Administrator Seema Verma touted the administration’s efforts to advance transparency and interoperability. The buzz was about two proposed rules:

The Office of the National Coordinator for Health Information Technology (ONC) unveiled its information blocking rule which defines exceptions to data blocking, and fines that may be associated with the practice as originally mandated by the 21st Century Cures Act. The rule requires that electronic health data be made available at no cost. with seven exemptions that permit providers and HIT companies to withhold including o protection of privacy, cybersecurity risks, the potential for physical harm to a patient and others. If the rule is finalized, providers could be penalized $1 million per instance of information blocking.

The Centers for Medicare & Medicaid Services (CMS) released a proposed rule which requires that Medicaid, the Children’s Health Insurance Program, Medicare Advantage plans and Qualified Health Plans be required to make enrollee data immediately accessible by 2020. That means 125 million enrolled in these programs would have access to their own data immediately. Providers would be required to adopt technologies to allow patients easier access to their data as they move between federal health programs and the government would publicly disclose providers/ hospitals that do not comply.

And the buzz about release of the 4.0 version of the draft standard FHIR, (Fast Healthcare Interoperability Resources) Specification, which is a standard for exchanging healthcare information electronically published by HL7, got enormous attention. It essentially makes interoperability easier for developers since by FHIR solutions are built from a set of modular components called “Resources” that can be assembled into working systems to solve clinical and administrative problems at a fraction of the price and quicker than existing alternatives and across multiple contexts – mobile phone apps, cloud communications, EHR-based data sharing, server communication in large institutional healthcare providers, and others. So what? It means that health information from a variety of sources will be more universally accessible and affordable. It also means hospitals will face growing competition from outside organizations wishing to be a community’s trusted source for total information about health. It’s a big deal!

The bottom line: the information consumers can control and the role hospitals play in making it available will be more complicated and no doubt costly.


Cooper et al “Hospital Prices Grew Substantially Faster Than Physician Prices For Hospital-Based Care In 2007–14” Health Affairs February 2019

Holahan et al“Slow Growth in Medicare and Medicaid Spending per Enrollee Has Implications for Policy Debates” Urban Institute February 2019

Cuckler et al National Health Expenditure Projections, 2017–26: Despite Uncertainty, Fundamentals Primarily Drive Spending Growth Health Affairs February 14, 2018

Huron cost management

American Hospital Association TrendWatch. (2016.) Administrative Simplification Strategies Offer Opportunities to Improve Patient Experience and Reduce Costs. January 2016.

Institute of Medicine. (2011.) “The Healthcare Imperative: Lowering Costs and Improving Outcomes – Workshop Series Summary”. February 24, 2011.

Reforming America’s Healthcare System Through Choice and Competition HHS December 3,2018 US Department of Health and Human Services

Trends in Hospital Inpatient Drug Costs: Issues and Challenges February 2016