Dramatic Slowdown Seen in Hospital Cost Increases

The rate of increase in costs for hospital stays in California has dropped dramatically to less than half of what it was just three years ago, two state agencies said Thursday.

While the agencies differed in the way they calculated rates, both agreed that increasing competition among hospitals and financial pressures from government health care programs and private insurance companies have put the brakes on hospital costs that were climbing by 20% a year in 1981 and 1982.

The charges for a hospital stay of about a week averaged $5,948 in the first half of 1985--an increase of 9.1% over the previous year, reported Gregory Roth of the California Health Facilities Commission.

Several Measures

Roth noted that, by several measures, hospital costs have been rising at about twice the general inflation rate in recent years--far less than they were in 1982 when the rate of increase per hospital stay was 21.3%.

However, there are some signs that costs may be rising again.

Figures provided by Roth show that the average cost per hospital stay climbed 6.5% between 1983 and 1984. In the first six months of 1985, the costs rose at an annual rate of 9.1%. Roth said that it was too early to know for certain whether this means that costs are accelerating again.

In its own study of hospital costs, the office of statewide health planning pointed out that the average amount Californians spent on hospital care increased by only 1% between 1983 and 1984.

California hospital costs have long been among the highest in the country. But in recent years, fewer patients have been entering hospitals and once admitted they have been staying for shorter periods, said Ted Fourkas of the California Hospital Assn., a group representing the hospital industry.

“It is a slow but steady trend,” Fourkas said.

Both because of competitive pressures and because of a drop in patients, hospitals have cut back on staff and equipment to limit their costs and charges, he said.

In a prepared statement, Larry Meeks, director of the state health planning office, attributed the slowing of cost increases to the elimination of regulations that govern hospital construction. That policy, backed by Gov. George Deukmejian, “is encouraging real competition in the health care delivery industry,” Meeks said.

“We’re approving every (hospital construction plan) that is legally approvable and letting hospitals face the financial consequences,” a spokesman for the office said.

Government Programs

However, Fourkas and others believe that other changes in state and federal health care policies have had an even more significant effect in cutting double-digit cost increases that plagued hospitals in the state for a decade.

In 1982, then-Gov. Edmund G. Brown Jr. signed legislation that allowed the state to negotiate rates with hospitals for patients on Medi-Cal, the federal and state health care program for the poor. In the past, Medi-Cal paid hospitals based on their costs, which were rising almost uncontrollably.

About 15% of patients admitted to hospitals are Medi-Cal recipients.

As part of that landmark legislation, private insurance companies were also allowed to negotiate rates with hospitals.

Fixed-Fee Payment

Then in 1983, the federal government imposed new cost controls on hospital costs covered by Medicare, the federal program providing health care to the nation’s elderly. Instead of reimbursing the hospitals an amount based on actual costs, Medicare began paying only a fixed fee for a procedure. Hospitals that could treat the patient for less than the fixed fee could realize a profit. Those that spent too much would lose money.

About 40% of patients admitted to California hospitals are covered by Medicare.

The combination of changes brought about a revolution in the way hospitals charge for and deliver services.

Some critics have complained that the increased cost-consciousness has forced the early release of patients who might benefit from longer stays.

But the result has been a definite slowing in increases in the amount spent on hospital care.