Context Matters: The Truth about Hospital Spending and Health Care Costs

Recent analyses of national health spending have again placed hospitals at the center of the affordability debate. A recent Kaiser Family Foundation brief examines the role hospital care has played in recent spending growth — and raises familiar questions about why hospitals account for a large share of health care dollars.

Those questions matter. But the answers depend heavily on how the data are interpreted and what context is applied.

Hospitals account for roughly one‑third of national health expenditures (NHE), a share that has remained relatively stable since the early 1980s, when it was considerably higher. This share reflects the unique and indispensable role hospitals play in the health system.

Hospitals are where the most expensive episodes of care are concentrated: 24/7 emergencies for all who come through the doors, intensive care, complex procedures, and complications that cannot be treated or managed elsewhere. Hospitals also disproportionately serve patients who are older, medically complex, or who face significant non-medical barriers that make care harder to deliver and requires higher fixed costs. As a result, hospital spending is easier to see and easier for detractors to scrutinize.

However, it is critical to understand what hospital spending measures include. NHE data categorizes spending by site of care, not by who manufactures or sets prices for the underlying products. Hospital payments often bundle clinical services with substantial pass‑through costs, including hospital‑administered drugs, medical devices and supplies. Reassigning those inputs to other spending categories would change the apparent hospital share without changing total health spending. For instance, reclassifying hospital spending on drugs to the retail drug spending category in the NHE would decrease the hospital share of NHE and increase the drug share substantively.

As actuaries from the Centers for Medicare & Medicaid Services noted when discussing the most recent spending data, “prices are a factor. They’re part of the equation. But non‑price factors are the driver.” Increased demand for care and changes in the mix and intensity of services explain much of the recent acceleration in spending, particularly for hospital care, physician services and prescription drugs. Others agree that recent growth in health spending has been driven primarily by increases in the volume and intensity of care rather than unusually high price growth. In fact, researchers at Brookings found that commercial hospital price increases went from 2.3 percentage points above the general inflation rate in 2000-10 to 0.5 percentage points above the general inflation rate in 2011-24, a decline of 1.8 percentage points annually.

Health spending deserves scrutiny, but it also deserves context. Sustainable affordability solutions require addressing the structural drivers of health care costs rather than drawing inaccurate conclusions from headline numbers alone.