February 8th, 2019
They say that nothing in the world is certain except for death and taxes. Maybe we should add “high health care costs” to that list of certainties, because they don’t seem to be going away anytime soon.
Hospital costs in particular have increased to extreme levels over the past few years. According to a new analysis from policy expert Avik Roy at the Foundation for Research on Equal Opportunity, in 2018 the share of household income going to hospital costs exceeded the federal tax rate for median income families.
The federal tax rate for a family of median income was lowered from 14.8% to 13.8% because of the Tax Cuts and Jobs Act, which went into effect for tax year 2018. But even without the new tax law, hospital costs would still overtake taxes in 2019 and beyond.
The typical household depicted in Roy’s analysis does not necessarily reflect the distribution of costs across households; most households pay no hospital costs and a few pay much more than 14.7% of their income. However, hospitals costs don’t just affect households that have members that are hospitalized. In reality, growing hospital costs affect all of us, because we pay for those covered under Medicare or Medicaid through taxes, and rising costs are reflected in higher insurance premiums, which we pay whether or not we were hospitalized.
According to Roy’s analysis, projected hospital spending is estimated to exceed $13,000 per household by 2026, which is nearly one-fifth of household income. How have hospital costs grown so dramatically?
Increasing prices are a large part of the problem. A recent study in Health Affairs found that hospital prices have increased at a rate significantly higher than physician prices. From 2007 to 2014, prices for hospital inpatient care grew by 42%, while prices of physician services grew by 18%. Hospitals have been able to increase their prices in part because of increased market share from mergers and expansions. The bigger hospitals get, the less bargaining power insurers have to negotiate prices, leading to higher prices for hospital care.
The authors of the Health Affairs piece recommend policies to reduce hospital price growth, including “antitrust enforcement, administered pricing, the use of reference pricing, and incentivizing referring physicians to make more cost-efficient referrals.” Other ideas we’ve proposed include grading hospitals on their pricing practices as well as quality, fixing hospital revenue as part of a “global budget,” and taking away tax-exempt status for hospitals that continue to consolidate without giving back to their community.
However, these policies and regulations will not just happen on their own. It will take a strong push from both patients and doctors to reduce hospital costs in the face of these increasingly powerful institutions.