Why Are Hospital Prices Rising?
The substantial rise in health care expenditures that has occurred in the U.S. has been accompanied by rapid increases in the prices that hospitals receive for treating privately insured patients. We use data on revenues by payer type to identify the determinants of rising hospital prices in Texas between 2000 and 2007. Approximately two-thirds of the increase in prices can be explained by increases in the costs of care, which may reflect technology growth. Part of this cost increase could also be attributable to sicker patient populations, as patients with less severe conditions are increasingly treated in freestanding facilities. We find little evidence that rising hospital prices are attributable to increased hospital market competition, and no firm evidence that hospitals are raising prices in response to lower reimbursement from Medicare, Medicaid, or uninsured/selfpay patients. We can explain more than half of the observed price increase with hospital, patient, and market characteristics, but a sizable portion remains unexplained. Finding the optimal policies for controlling hospital price increases will require additional research to identify all of the underlying factors determining prices in this market.