A Closer Look At Hospitals Costs with Our Founder, Bill Cleverley

I have been in the hospital industry as both a professor and consultant for 51 years. One thing that has never changed in these 51 years is that healthcare and hospitals in particular have been singled out for rising costs—which, translated, means that healthcare and hospitals are absorbing a greater percent of our nation’s Gross National Product (17.6%) in 2023.

I may be old, but I have heard about Artificial Intelligence (AI), so I went to ChatGPT because they seem to have all the answers and asked this question “What has caused hospital costs to increase?”  This is what I received:

1. High Labor Costs: Hospitals employ a wide range of highly skilled professionals, such as doctors, nurses, and specialists. The compensation for these workers, along with benefits like health insurance and retirement plans, significantly contributes to hospital expenses.
2. Medical Equipment and Technology: Hospitals use expensive medical equipment and cutting-edge technology, such as imaging machines (MRI, CT scans), surgical instruments, and diagnostic tools. The cost of purchasing, maintaining, and upgrading these technologies can be substantial.
3. Administrative Costs: Hospitals are often burdened with high administrative costs due to the need to comply with complex regulations, billing procedures, insurance claims, and other paperwork. This can involve hiring a large number of administrative staff and implementing expensive software systems.
4. Pharmaceutical Costs: The cost of medications, including brand-name drugs and specialty treatments, can be extremely high. Hospitals also typically pay more for medications than individuals would at a pharmacy, due to markups and negotiations with suppliers.
5. Overhead and Facility Maintenance: Running a hospital involves significant overhead costs for utilities, facility upkeep, insurance, and security. Hospitals need to be constantly maintained to provide a safe and sanitary environment for patients, which adds to costs.
6. Malpractice Insurance: Hospitals face the financial burden of malpractice insurance premiums, which can be expensive due to the risks associated with medical care and the legal environment in which hospitals operate.
7. Cost of Specialized Care: Providing specialized treatments or surgeries often requires high levels of expertise, additional resources, and longer patient stays, all of which increase overall costs.
8. Underpayment from Insurance: Hospitals often do not receive full reimbursement from insurance companies or government programs like Medicaid and Medicare. They may charge higher rates to compensate for the shortfall, which can result in higher costs for insured patients.
9. Uncompensated Care: Hospitals often provide care to uninsured or underinsured patients, which results in financial losses. To offset these losses, hospitals may raise prices for other patients.
10. Market Factors and Consolidation: In some regions, hospitals are consolidating into larger health systems, reducing competition. This can lead to higher prices for services. Additionally, there is often limited price transparency, making it harder for patients to compare costs.

All of this sounded really good and was obviously a compilation of who knows how many articles—but it does not answer the question that people often ask, which is why US costs are higher than other developed countries? One of the most important factors creating higher healthcare costs is our propensity for poor life choice patterns: we eat too much of the wrong foods, don’t exercise, and are prone to violence.  For example, the United States has the highest rate of obesity when compared to other developed countries according to the World Health Organization. Our rate of 41.6% ranked us as the 10^th highest in the world.

So how does obesity correlate with high health care costs? Obesity is often linked to a higher incidence of many chronic conditions such as diabetes, high blood pressure, cancer, kidney disease, and many others and chronic conditions create high healthcare costs. According to the Centers for Disease Control (CDC), 90% of the $4.1 trillion in U.S. healthcare costs can be attributed to chronic or mental health conditions. Chronic disease accounts for 81% of all hospital admissions, 91% of all prescriptions filled, and 76% of all doctor visits.

While our life patterns may affect the incidence of chronic disease and create higher rates of hospital admissions our costs for hospital care on case specific basis are higher than other developed countries in most cases. Many of the factors cited by ChatGPT earlier are causes for our higher costs, but we must remember that cost is not the same thing as value. Any assessment of value is the product of many factors, but chief among them are cost and quality. This may be anecdotal evidence, but I don’t hear of many Americans seeking medical care in countries outside the US, but we do see people outside the US coming to the US for care.  This would seem to indicate the US hospital system is perceived as high value relative to their own countries, especially for specialized procedures.

With inflation at high rates, a final question to answer is how has the hospital industry performed in controlling their costs since 2020. The chart below attempts to provide some clues in this area.

The table clearly shows what all of us know too well, the CPI has risen 17.7% in the period 2020 to 2023. Charges for inpatient and outpatient procedures after adjusting for case- mix differences increased at rates below general inflation. While charges reflect payment before discounting, costs are a much better indicator of actual payment because most hospital margins are fairly modest, averaging around 4 to 5 percent.  The rates of actual cost increase are even less.

So, what is the final takeaway? I think that there are three things to remember.  First, while hospital and healthcare costs may be high relative to other countries, there may be some significant population demographics at play such as obesity rates. Second, higher costs are not necessarily bad if they are associated with increases in value. Newsweek’s listing in 2024 of the world’s best hospitals clearly show US domination, four of the top 5 ranked hospitals are in the US. Third, in the most recent time period US hospitals appear to be controlling costs better than other industries in our economy.  In the words of an old country song—“No matter if he is a hound—they gotta quit kicking my dog around.”  Perhaps it is time to find another dog to kick around.