Affordability starts with understanding hospital costs

By Rick Pollack

This is a lightly edited excerpt of testimony recently provided to the U.S. House’s Energy and Commerce Subcommittee on Health hearing on titled, “Lowering Health Care Costs for All Americans: An Examination of the U.S. Provider Landscape.” 

Hospitals and health systems share Congress’s commitment to improving health care affordability, lowering costs and maintaining access to health care services. As we discuss ways to accomplish these goals, it is important to recognize the environment that hospitals are operating in.  

Hospital care today is more advanced, more effective and more resource intensive than ever before. It is powered by the skill of the nation’s clinical caregivers, breakthroughs in medical technology and sustained investments in the infrastructure needed to deliver modern care. The result is that patients are living longer, recovering faster and benefiting from treatments that would have been unimaginable just a generation ago. 

At the same time, hospitals are balancing significant cost pressures as they treat a sicker and more medically complex, aging patient population, all while operating with persistent misalignments in how care is financed and reimbursed.  

Investing in our nation’s care teams

Hospitals and health systems exist and function because of the doctors, nurses, technologists, facilities management specialists and many other professionals who dedicate their lives to helping others. We cannot take care of patients without these caregivers and team members who are always there to care. Hospitals and health systems are committed to supporting the workforce, including by expanding training and education programs, reimagining workforce models, investing in upskilling and providing non-traditional supports for health care workers.  

At the same time, labor costs are the most significant driver of what it costs to operate a hospital. Labor and workforce expenses account for roughly 60% of total hospital costs. Over the past five years, labor costs have risen sharply. This growth was initially driven by the extraordinary strain of the pandemic, but it is increasingly shaped by persistent workforce shortages. Many experienced clinicians have left the workforce, burnout remains high, and the pipeline of new physicians, nurses and other health care providers has not kept pace with demand. To address these issues, hospitals have ramped up investments in recruitment and retention efforts while maintaining essential community services, even as many hospitals have operated at or below breakeven financial levels. Hospitals also have leveraged technologies like AI to reduce administrative burden. While hospitals have been proactive in leveraging these AI tools, additional investment is needed to address infrastructure barriers like workforce training and digital literacy.

Sharp increases in costs of medical supplies and drugs

Hospitals also have faced faster growth in the cost of goods and services required to care for patients. Spending on medical supplies, equipment and technology has increased significantly as hospitals, like others in the broader community, have had to contend with inflation and global supply chain pressures. Hospitals’ total spending on supplies increased 9.9% in 20251, reflecting higher prices for everything from disposable medical gloves to pacemakers, ventilators and other technology that clinicians rely on every day, as well as lifesaving medical innovations like advanced imaging systems, implants and new surgical devices.  

In addition, as is the case for patients, prescription drugs represent another significant, direct expense for hospitals. Hospital drug expenses increased 13.6% in 20252. Hospital spending on drugs has grown faster than inflation, driven by both price increases on existing medications and the rapid adoption of new, high-cost therapies. Breakthrough treatments, particularly in oncology and other specialty areas, can be clinically transformative, but they often cost tens or hundreds of thousands of dollars per patient, with some costing in the millions.  

Navigating challenges and responding 

Taken together, these dynamics highlight the incredibly challenging environment that hospitals must manage. These pressures have mounted even while hospital prices have increased moderately in the aggregate.

Looking ahead, recent changes to Medicaid and the health insurance marketplaces will further add to the financial and operational challenges hospitals and health systems and the communities they serve already face. Reducing federal Medicaid funding and limiting key state financing mechanisms will widen existing payment gaps and increase the number of uninsured patients. Together, with the expiration of the enhanced premium tax credits, these policy shifts will lead to higher levels of hospital uncompensated care and bad debt. Those costs will make it harder for hospitals to sustain services and preserve access to care in their communities. In addition, as more uninsured individuals rely on emergency departments for routine primary and preventive care, communities can expect longer waiting times and added strain on the entire health care system, affecting all patients.

Due to these ongoing pressures, some hospitals facing financial hardships turn to affiliation with other hospitals or health systems. These partnerships, which can range from clinical collaborations to mergers, can help maintain services, expand access to specialists, improve care coordination and provide the scale needed to remain viable. Affiliation can be especially helpful in rural areas where hospitals often operate with thin margins, inconsistent patient volumes, and limited access to capital and workforce.

Read the full testimony here.

Rick Pollack is the President and CEO of the American Hospital Association.

_{*The opinions expressed in this column are those of the author and do not necessarily reflect the views of HealthPlatform.News.}