Health Economist: “If We Ignore Rising Hospital Prices, It Is at Our Peril.”

In a very important piece on health care costs and spending, Zack Cooper, a health economist at the London School of Economics argues “If we’re serious about reducing U.S. health care spending, then we need to focus on reigning in hospital prices for the same reason that Willie Sutton robbed banks.”

Cooper has written a number of pieces for the Altarum Institute on health care costs and spending, but this one is particularly focused on one of the main drivers of higher costs — hospital prices.  Cooper argues:

“…variation in hospital spending is the single largest factor driving the difference in spending across Organisation for Economic Co-operation and Development (OECD) countries [once an adjustment for wealth is made]. This shouldn’t be terribly surprising either. The U.S. hospital sector is one of the largest industries in the United States. Indeed, it’s a $700 billion dollar industry, and there is twice as much money spent on hospital care than is spent on the purchase of new cars.”

Cooper goes on to say the two main reasons for higher hospital costs is twofold: higher prices and higher input costs (i.e. salaries).  Cooper writes that “analysts at McKinsey came to the conclusion that higher hospital costs in the U.S. are not driven by differences in quality or the relative health of U.S. citizens.”

Cooper then writes about three other explanations including changes in prices reflecting improvement in care (although he disputes this); cost-shifting (again he disputes); and finally the consolidation of hospital markets.  Cooper writes:

“A third potential explanation for the rise in hospital prices is the huge consolidation that has occurred in the U.S. hospital industry over the last 15 years. During this period, hospital markets have become about 33 percent more consolidated and the average number of hospitals in a market has reduced from six to four… Indeed, while it’s difficult to estimate, the notable research in this area has found that hospital consolidation can dramatically raise prices, inducing increases of between 10 to 40 percent.”

Cooper ultimately concludes:

“…if we’re serious about slowing health care spending, we need to continue to focus on hospital care. Hospital prices are increasing substantially faster than inflation and it’s clear that the U.S. hospital market is approaching dysfunction. Whether policymakers adopt a more regulatory approach…or a more typically market oriented approach…it is clear that if we ignore rising hospital prices, it is at our peril.”

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