Hospitals are the Principal Driver of Health Care Inflation

In Friday’s discussion, I noted that statistical data revealed that the largest share of increased national health expenditures can be attributed to medical price inflation. At the same time, the smallest share can be attributed to value added.

As a result, a closer look at health care inflation is in order. Data provided by the U.S. Bureau of Labor Statistics reveals:

• Medical price inflation is not broad-based. Instead, a single sector is the major contributor. Both during the 2000-08 timeframe and during the very recent July 2008-July 2009 period, hospital and related services saw, by far, the largest price hikes.

• Professional services e.g., physician services, saw a slowdown in price increases during the July 2008-July 2009 timeframe, even as consumer prices overall fell.

The following tables provide a snapshot of medical price changes and overall changes in consumer prices.



In sum, the key to taming medical price inflation likely depends on a fundamental restructuring of the nation’s hospitals so that the hospitals become more sensitive to overall economic developments and increase their overall productivity. Such a restructuring would entail states and localities making it easier for poorly-run hospitals to fail, better run hospitals to expand across state borders, and international hospitals to enter the U.S. market, among other things.

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