Hospital Costs:

Adoption of Technologies Drives Cost Growth

HRD-92-120: Published: Sep 9, 1992. Publicly Released: Oct 14, 1992.

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Pursuant to a congressional request, GAO provided information on hospital costs and Medicare's ability to provide adequate payments under the prospective payment system (PPS), focusing on: (1) the impact of PPS on growth of hospital operating costs; and (2) factors which have caused persistent increases in hospital costs, including acquired immune deficiency syndrome (AIDS), malpractice insurance, and hospital administration.

GAO found that: (1) hospital operating costs increased 63 percent above the general inflation rate from 1980 to 1989; (2) operating cost rate growth slowed after the introduction of PPS in 1984, but increased to nearly 7 percent by 1988; (3) PPS hospitals receive a fixed fee based on patient diagnoses, which gives hospitals incentives to provide more efficient care; (4) the introduction of PPS has decreased the length of hospital stays and the number of admissions; (5) outpatient visits increased by 39 percent, while inpatient services became more complex; (6) new technologies have led to increases in operating costs; (7) hospital competition based on service rather than price, physicians practicing defensive medicine to prevent malpractice claims, and high insurance coverage coupled with low consumer out-of-pocket expenses are all incentives which cause operating cost increases; (8) AIDS-related costs have permanently increased operating costs, but have had a negligible impact on the rate of cost growth; (9) annual malpractice costs have increased, but have also had a negligible impact on cost growth; and (10) hospital administration cost increases accounted for more than 10 percent of annual operating cost growth.

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