Why Is Healthcare So Expensive? The Significant Rise of Hospital Costs

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 Why is healthcare so expensive? What is driving the sudden spike in health insurance costs? 


Businesses have experienced a sudden rise in healthcare costs over the last two years. There are several factors that have contributed to these large increases. 


Hospitals and health systems are under considerable financial strain due to inflationary pressures resulting in rising labor and non-labor expenses. Hospital costs have increased by 17.5% between 2019 and 2022. According to the American Hospital Association (AHA), post-pandemic labor shortages led hospital contract labor expenses to jump up to 258% compared to pre-pandemic levels.   


Hospital expenses for non-labor components such as specialty drugs, medical supplies, laboratory services, equipment, and purchased services like food and nutrition services have increased by 16.6% per patient since 2019.

Additionally, ever increasing health insurer policies like prior authorizations, denials, and multiple audit requirements, have placed significant burdens on hospitals. This has contributed to not only increased administrative costs but also physician and nursing staff burnout, and time away from patient care potentially affecting access and quality of care. 


On the other hand, hospital revenue from Medicare and private health care insurers rose at much lower levels than their expenses, directly impacting their bottom line. AHA noted that “over half of hospitals ended 2022 operating at a financial loss — an unsustainable situation for any organization in any sector, let alone hospitals.”   


As hospital contracts with private health insurers come up for renewal, hospitals are asking for double-digit price increases so that they can cover what it costs them to provide patient care and remain financially viable. Insurance contract cycles are typically between 3 to 5 years, so it should be expected that this trend will continue into 2024.  


How Will Rising Hospital Costs Impact Businesses? 


The downstream effect of healthcare inflation is being felt by businesses, who are already struggling to afford quality health care benefits for their employees. Unfortunately, many employers are forced to share the higher costs with employees by increasing their share of premium contributions and out of pocket expenses like deductibles and coinsurance. 


This can lead to less than attractive benefit packages, which can lead to disgruntled employees and lower retention rates. 


Healthcare is now a top business expense – second only to payroll – and costs have spiked over 150% in the last 10 years, according to a Mercer survey. Worse, costs are expected to double in the next four years.  


Employers who self-fund their health insurance benefits have some degree of control in mitigating these costs, especially when it comes to encouraging preventative measures and using higher-quality providers.   


But employers who fully fund their insurance plans under traditional carriers will bear the burden of these price increases in the form of higher insurance rates in subsequent years without full transparency around factors contributing to premium increases.  


That’s probably why more companies, including small to midsize businesses, are exploring their options and self-funding their health insurance plans. 


“The bottom line is you better be buying healthcare more efficiently because otherwise you take these cost increases on the chin,” said Mike Schroeder, Founder and President of Roundstone.

“Self-funding provides transparency into cost drivers and their causes – information to know where there are opportunities to save money,” he continued. “The good news is if you are self-funded you have the opportunity to manage those costs more efficiently when you consume healthcare from a value perspective.”


How to Mitigate Escalating Hospital Costs in a Self-Funded Insurance Plan 


To help mitigate rising hospital costs, Daniel Demyan, Roundstone’s Cost Containment Strategist, stresses the need for preventative services to minimize going into the hospital in the first place.  

“If employees are encouraged to get preventative care, they’ll be healthier, which will help keep them out of the hospital in the long run,” he said.   


The best thing employers can do is limit financial and geographic barriers to preventative healthcare services, Demyan said. He encourages employers to offer primary and preventative services at no cost to the employee to encourage their personnel to proactively address health issues. 


Demyan also encourages telehealth whenever appropriate, as well as healthcare navigation services such as Rightway which make it easier for members to find preventative care.   


He also advises employers to explore workplace wellness incentives, maintaining a company gym or sponsoring gym memberships, and other measures that make it easier for employees to maintain healthy habits.


Other Considerations for Employers and Employees to Reduce their Healthcare Costs


I’d further advise various strategies that employers and employees can adopt to lower their healthcare costs. For employers, they include: 


  • Offer smaller networks of higher quality hospitals and physicians that can lower cost of care. 
  • Offer employees incentives to seek care at less costlier settings when appropriate; for example, urgent care versus emergency room, or using freestanding versus hospital based diagnostic centers for lab and radiology. 
  • Understand the types of contracts the insurers are negotiating with hospitals and physicians. Value based contracts that pay providers based on patient clinical outcomes aim to hold providers accountable for lowering the cost of care. 


Employer coalitions can have a powerful voice in: 

  • Contentious contract negotiations that threaten provider network status impacting employees. In many failed contract negotiations, employer action has often influenced parties to come to the table to settle on a reasonable outcome. 
  • Demonstrating who their outlier hospitals are in their region, based on cost of care and quality through scorecards  


For employees and families they include:  


  • Verify that your provider is in-network, so you do not incur expensive out-of-network costs and balance billing. 
  • Use cost-of-care estimator tools that many large hospitals and insurance companies now offer on their websites, so you can fully understand your financial liability and any cost variations from one facility to another. 
  • Understand your benefits including covered versus non-covered services, and your out-of-pocket expenses such as deductibles, coinsurance, copays, and out-of-pocket maximums. 
  • Be aware of cost differences between more expensive settings like hospitals and emergency rooms versus lower cost settings such as telemedicine, freestanding centers for surgeries, laboratory, radiology, and urgent care.  


Self-funded insurance provides more leverage over expensive health insurance costs, including expensive hospital rates. Through self-insurance, employers can choose more affordable hospitals to include in the plan, as well as use cost containment tools to drive down healthcare expenses and further improve the savings of a self-funded health plan. 






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