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. [Health Affairs 25, no. 1 (2006): 45-56] O c c a s i o na l n e ws s to r i e s have "exposed" inexplicable prices for products and services provided by hospitals, such as a five-dollar aspirin pill. During the past twenty-five years, hospital charges have gone from tracking fairly closely with production costs to exceeding them many times over. Are hospitals aggressive price-setters that are brazenly taking advantage of patients at their most vulnerable moments? Or have powerful payers lowered hospital payments to levels that force hospitals to seek additional funding from a limited number of other payer groups?This paper attempts to shed light on the forces that have generated the gap between billed charges and underlying costs by tracing the history of setting charges for hospital services and examining the role and implications of the chargemaster (catalog of retail list prices) for hospitals, purchasers, and patients. Data were obtained from a literature review and interviews with a small convenience sample of senior executives and other professionals working in the hospital industry in different parts of the country, including for-profit and not-for-profit settings.

ABSTRACT: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 increase, 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. [Health Affairs 25, no. 1 (2006): 11-21] U n i q u e a m o n g u. s . i n s t i t u t i o n s , general hospitals provide their services to anyone who walks through their doors.1 Unlike enterprises that provide other necessities such as food and housing, these hospitals render their services regardless of patients' ability to pay. They treat Medicaid and Medicare patients for less than cost; provide trauma units and AIDS clinics that consistently lose money; and provide medical care to the uninsured, often for free.Several factors have emerged that could erode hospitals' continued ability to provide these services. The market for hospital services is becoming increasingly competitive and price-sensitive, more closely resembling trends in global markets. In such markets, any nonessential cost or service is often squeezed out in the quest for price-competitiveness. In the past, hospitals could build the cost of free care and other money-losing services into their prices, because pricing was not transparent and insured consumers were not price-sensitive. In essence, hospitals were able to cross-subsidize-to charge higher prices to some (mostly private) patients to make up for losses from treating others. In this paper we show that hospitals' historical ability to do this could change. Increases in patients' responsibility for payment, price transparency, and competition from specialty providers threaten hospitals' ability to provide these money-losing services.What might the hospital world look like if the need for cross-subsidies continues, but the ability to cross-subsidize is largely reduced or even eliminated? The market for hospital services could become more efficient. Consumers would be better informed about price and value: Inefficient and nonessential services would be eliminated; price competition would increase; and the prices for hospital services would be lower. In this market, some consumers would be better off.But there is a dark side to price transparency and competition. In a world of true price competition, a hospital that provides free care and underreimbursed services cannot compete with a hospital that does not. As a consequence, if current trends continue, general community hospitals' financial stability could be threatened. In fact, a world in which U.S. hospitals are required ev...

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.

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.