Hospital prices-both retail and wholesale-spiked last year and likely will again this year as the nation's nearly 5,000 acute-care facilities try to recoup payment shortfalls from Medicare and Medicaid. The price increases are further evidence that the industry is working hard to pull itself out of a profitability slump that hit in 1998 and 1999.
That good news, however, will make it even tougher for hospitals to sell federal lawmakers on a third consecutive year of budgetary relief from Washington. This new economic data comes on the heels of a decision by the Medicare Payment Advisory Commission to recommend against giving hospitals a bigger boost in Medicare payment rates than what they're budgeted to receive (Jan. 15, p. 4).
American Hospital Association officials said they are still deciding what to lobby lawmakers for this year, but the organization will continue to work on adequate reimbursement issues.
Hospitals have received two consecutive years of payment increases, worth a total of $51 billion, to reduce payment limits imposed by the Balanced Budget Act of 1997.
"There are more problems with reimbursement than just (the balanced-budget law)," said Richard Wade, the AHA's senior vice president for communications.
But to get more money, hospitals will have to overcome data that show consumer prices at the nation's hospitals rocketed 6.2% last year, nearly twice the overall inflation rate of 3.4% for all goods and services, according to the Labor Department's Consumer Price Index released last week. The price hike was the heftiest since 1993 when hospitals raised retail prices 7.6%, according to the CPI, which measures changes in retail prices.
The hike in retail hospital prices was matched with a 3.7% increase in acute-care hospitals' net revenue last year, the Labor Department's year-end Producer Price Index shows. The PPI measures changes in net revenue or the money actually collected by hospitals. In 1999, hospitals' net revenue grew 1.6%.
The industry appears to have entered a cycle of rising prices, said Barry Schilmeister, a principal with the consulting firm William M. Mercer in New York. These cycles, he said, can last five years, and "I don't think we're at the end of that cycle."
Hospitals are increasing prices in part because consolidations have given them the market power to do it, and they're looking for "every revenue source they can" in the wake of some reimbursement limitations, Schilmeister said.
Though Jim O'Connor, a consulting actuary at Milliman & Robertson in Chicago, expects prices to continue to "trend upward" this year, he said exactly how much "is hard to guess."
Hospital officials blame rising costs, especially for wages, for their price increases.
Milwaukee's 472-bed Froedtert Memorial Lutheran Hospital raised prices 5% in 1999 and another 5% last year, the first increases since 1996, said Froedtert spokesman Mark McLaughlin.
This year, Froedtert has not raised prices, McLaughlin said.
In addition to rising labor costs, other reasons for Froedtert's price increases include reimbursement shortfalls and the rising costs of pharmaceuticals and other supplies.
Labor costs are also one of the reasons behind an average 4% price hike at eight-hospital St. John Health System, Detroit, part of St. Louis-based Ascension Health.
St. John is spending "beaucoup dollars" on agency nurses because it can't hire enough nurses of its own, said Paul Van Tiem, the system's executive vice president and chief financial officer.
And the large number of uninsured means "to make ends meet you have to up charges on those that pay," he said.
But Don May, senior associate director of policy for the AHA, said the Labor Department's indexes don't offer a complete financial picture of hospitals because they don't show how hospitals' costs have increased in relation to the price increases. "So it doesn't really give us an indication of how well they're doing or not," May said.
The AHA's Wade said it is not known yet how last year's price hikes will affect hospital profitability.
"We have no idea," he said.
Thomas Hefty, chairman, president and chief executive officer of Blue Cross and Blue Shield United of Wisconsin in Milwaukee, said hospital price increases are all about cost shifting to help hospitals make up for losses they've incurred. Some of those losses, Hefty said, were caused by strategic decisions that backfired for some hospital systems, such as getting into the HMO and other non-acute-care businesses.