Hospital costs and the medicare program

Several causes may explain the rapid acceleration in hospital costs with the advent of Medicare and Medicaid. To sort out the influence of these separate factors, this article presents certain types of evidence of hospital cost inflation in the first 2 years of Medicare: overall trends in hospital revenues and expenses, labor and capital components of cost inflation, trends in individual hospital services, and the simultaneous influence of a number of sources of cost increase. The study findings reveal that many characteristics of hospital inflation in the pre Medicare period continued with greater intensity in the first 2 years of Medicare. Capital expenses continued to grow faster than labor expenses. Most of the rise in expenses has occurred in ancillary services rather than in basic room and board. The findings tend to support the demand pull view of hospital inflation and the views that emphasize changes in technology and expansion of the hospital's role. The labor cost push model does not fully explain hospital inflation, as costs per patient day would have risen at a 6 percent annual rate even if wages had remained constant. Econometric estimation of hospital costs over the pre Medicare and Medicare period indicates that Medicare affected hospital costs in much the same way as the growth of private insurance in the earlier period.