Study: Hospital, Pharmacy Charges Driving Up Healthcare Spending

A new study is shedding some light on some issues involved in recent overall cost increases in the U.S. healthcare system. Michael Bailit, president of the Needham, Mass.-based Bailit Health, a health policy consulting firm, published an article on Aug. 9 in the Forefront section of Health Affairs examining some of the elements involved in the current healthcare cost landscape.

The core question that Bailit asks is encapsulated in the title of the article, “What Is Driving Health Care Spending Upward In States With Cost Growth Targets?” As Bailit explains at the outset of his article, “In 2021, the Peterson Center on Health Care and the Milbank Memorial Fund partnered to support state efforts to slow health care spending growth. Six states participating in the Peterson-Milbank Program for Sustainable Health Care Costs have established per capita cost growth targets as a tool to enhance transparency and encourage reductions in the rate of health care spending growth across all payers and providers. The six states (Connecticut, New Jersey, Nevada, Oregon, Rhode Island and Washington) are complementing their cost growth targets and public reporting of performance relative to the target with a series of supporting activities. These include: in-depth analysis of claim data to provide greater insight into spending patterns and cost growth drivers; identification of opportunities to target action that will help achieve the cost growth target; and adoption and implementation of cost growth mitigation strategies.” And he notes that “Some of the states have started publicly reporting per capita spending growth relative to their targets, including a breakdown of spending growth by service category within different markets (i.e., commercial, Medicaid, Medicare). In addition, the states have been designing and implementing standard analyses using claims databases to gain greater insight.”

Bailit reports that, “While there is variation from state to state, per capita spending growth in the commercial market has generally been higher than in the Medicaid and Medicare markets,” and shows in a chart that, in the 2018-2019 time period, Medicare annual per capita cost growth was 2.2 percent in Connecticut and 1.3 percent in Rhode Island (and unavailable in Nevada); but the annual per capita cost growth was 6.1 percent in Connecticut, 4.7 percent in Rhode Island, and 9.2 percent in Nevada, in the commercial health insurance market. In the Medicaid market, Nevada did also see 9.2 percent annual per capita cost growth, while in Rhode Island, it was 4.1 percent. Connecticut saw a 0.9-percent decrease in average annual per capita costs, but, he explained in a note, “Connecticut’s negative trend for Medicaid in 2019 was driven by a reduction in long-term care spending growth. With long-term care spending removed, Connecticut’s Medicaid trend was 2.2. percent.”

What’s more, Bailit writes, “This pattern of commercial spending growth exceeding public payer spending growth is consistent with national trends of the past 12 years. Nationally, between 2008 and 2020, per capita commercial spending grew 46.8 percent, compared to 28.2 percent and 21.2 percent for Medicare and Medicaid, respectively, despite a decrease in commercial growth in 2020. The Centers for Medicare and Medicaid Services project that this pattern will continue. For two of the three states, the observed rates of commercial health care spending growth in 2019 far exceeded wage growth, indicating that health care spending was displacing wages for workers.” Per all that, he writes that “While high per capita spending growth is a concern in any market, limiting spending growth in the commercial market warrants special state attention.”

So what’s behind these trends? Bailit writes in a headline to the section on hospital and pharmacy cost issues, that “Hospital Spending And Pharmacy Have Been Major Drivers Of Spending Growth,” adding that “This pattern has appeared across commercial, Medicaid, and Medicare markets, although there is annual variation by state, and within states by market. Evidence of this pattern appears in analysis performed by Connecticut, Nevada and Rhode Island. For example,” he writes, “hospital spending and retail pharmacy have been the largest drivers of trend in both Connecticut and Rhode Island, although the role of inpatient versus outpatient hospital spending has varied between the states. Connecticut hospital outpatient and pharmacy trends each averaged over 7 percent in the commercial market between 2015 and 2019 (and inpatient hospital trend was only slightly lower, at 6 percent). Rhode Island hospital outpatient trend averaged 5 percent, and pharmacy trend averaged over 6 percent between 2017 and 2019. Retail pharmacy was the only service category with spending growth in Rhode Island in 2020.” As a result, he writes, “In at least some states, cost growth mitigation work—across markets—should focus on hospital and pharmacy services, as these sectors account for a disproportionate percentage of total spending growth.”

Bailit summarizes his findings in yet another headline, which reads, “Price Increases—Not Increased Service Use—Have Generally Been The Cause Of High Rates Of Hospital And Pharmacy Spending Growth.” Indeed, he writes, “Price increases in most years have been highest in the commercial market. While there is some variation across states, a national analysis of commercial claim data by the Health Care Cost Institute found that from 2015 to 2019, approximately two-thirds of the increase in spending growth was due to increases in service prices. In addition, a 2022 Congressional Budget Office report stated, “The main reason for the growth of per-person spending by commercial insurers—and for the difference from the growth of per-person spending by Medicare FFS—has been rapid increases in the prices that commercial insurers pay for hospitals’ and physicians’ services.”

Further, he writes, “Analysis by Connecticut has revealed that commercial prices grew fastest between 2015 and 2019 for those hospitals that primarily serve commercially insured patients. This indicates that hospital market power and associated price discrimination have driven prices upward, rather than hospitals responding to lower levels of payment from public payers (‘cost shifting’).”

And, Bailit states, “While the past two years have demonstrated how unpredictable the future can be, the underlying dynamics that have propelled past health care spending growth, and specifically price growth, remain intact. Market consolidation appears likely to only increase, creating upward pressure on prices, especially in the commercial market. In addition, limited market competition and a lack of regulatory levers should mean continued high growth in pharmacy prices. Finally, rising labor and supply input costs during 2021 and 2022 are likely to result in elevated trend for at least the next two years.”