As data show a spike in spending on hospital services, new report lays out savings options

Accelerating hospital-focused expenditures helped spur a 2023 increase in national health spending, according to newly released actuarial data.

Spending on hospital services surged by 10.4% for the year, up from a 3.2% increase in 2022 and 3.4% for the three-year period spanning 2020-22. The 2023 increase was the biggest seen since a 10.8% jump in 1990.

Partially as a result, total healthcare spending (including clinical research and public health activities) jumped by 7.5% to reach $4.9 trillion, or 17.6% of GDP. In 2022, spending had risen by 4.6% and amounted to 17.4% of GDP. The 2023 share of GDP still was lower than in the peak pandemic years of 2020-21 and roughly the same as it was in 2019.

The spending increase dropped from 7.5% to 4.4% when accounting for healthcare price inflation, up from 1.4% using that adjustment in 2022. Spending per capita reached $14,570.

Why spending rose dramatically

Even amid an inflationary environment in recent years for labor, supplies and drugs, prices of hospital care have been relatively stable. Increases were 2.8% in 2022 and 2.7% in 2023. For healthcare overall, prices rose by 3% in 2023.

Use and intensity of services were more significant factors in the spending increase, CMS actuaries posited in the report. Hospital discharges rose by 1.6% after dropping slightly in 2022, while outpatient utilization also increased, especially in Medicare.

“The robust growth in hospital expenditures in 2023 reflected increased demand for medical procedures and strong growth in other private revenues” such as philanthropic funds, investment income and ancillary income, CMS actuaries wrote in a Health Affairs article.

As an example of demand, the article cited a Wall Street Journal report that “seniors [were] coming back to the healthcare system with a vengeance” after having refrained from seeking elective care for several years during the pandemic. The trend was straining payer finances and leading to higher 2024 bids by Medicare Advantage plans, according to the Journal.

One trend feeding high healthcare utilization was the proportion of the U.S. population with health insurance. That share reached a record 92.5%, up from 92% in 2022.

High enrollment rates for private insurance were driven by an increase of 2.7 million in the Affordable Care Act marketplaces, helped by subsidies that have enhanced the affordability of those plans.

The fate of the subsidies after 2025 likely will depend on whether congressional Republicans want to retain them. If the subsidies are terminated, CMS’s actuaries project a 2026 decrease of 7.3 million in direct-purchase insurance enrollment.

Eying policy changes

Possible curbs on federal healthcare expenditures, including for hospital services, were among the various options presented by the Congressional Budget Office in a report on ways to address the federal deficit.

The report does not make recommendations but describes routes to reduced spending, most of which Congress has discussed. Republicans are expected to scrutinize spending when they take narrow control of both chambers for 2025 and 2026.

For example, the report says outlays for graduate medical education could be reduced by shifting funding to a grant program that would cover both direct and indirect costs. In the scenario described in the report, funding for 2026 would be based on 2024 levels, with levels for subsequent years based on economywide inflation. Federal savings would total $94 billion over 10 years, or $103 billion if the annual adjustment were set at 1% below inflation.

Decade-long savings would amount to $157 billion from implementing site-neutral payment at all hospital outpatient departments for services commonly provided at physician offices. Savings would be $5.6 billion from limiting site-neutral payment to drug administration services, which was proposed as part of 2023 legislation passed by the House of Representatives, and $7.6 billion from applying the policy exclusively to imaging services.

Congress could achieve 10-year savings of $73.5 billion by reducing Medicare Part B payments to hospitals that participate in the 340B Drug Pricing Program. That level of savings would come from dropping payments to average sales price minus 22.5%, a percentage-point difference of 28.5 from current levels.

The Trump administration incorporated that reduction in 2018, but the change was challenged in court and ultimately overturned in a unanimous Supreme Court decision. However, the court indicated the change would be permissible if implemented based on a formal survey of hospitals’ drug acquisition costs.

Other Medicare, Medicaid changes

If Medicare reimbursement for allowable bad debt were eliminated, savings would accrue to $54 billion over 10 years, according to the CBO. Savings would be $33 billion by reducing bad-debt coverage from the current share of 65% down to 25%, or $16.7 billion if the covered share were reduced to 45%.

Savings would be $489 billion over a decade by effectuating a 10% cut to benchmarks in the Medicare Advantage program.

“This option would result in higher cost sharing, higher premiums and fewer supplemental benefits for Medicare Advantage enrollees,” the report states.

The report also examines the impact on Medicaid spending of limiting or eliminating hold-harmless state tax arrangements for providers. Those arrangements, many of which fund state-directed Medicaid supplemental payments, currently have a limit equal to 6% of a provider’s net patient revenue.

Options described by the CBO include restricting hold-harmless arrangements to 5%, to 2% or eliminating them altogether. The 10-year savings would range from $48 billion to $612 billion, with federal savings generated in conjunction with lower levels of state Medicaid spending.