A whopping 55.4 percent of the total increase in hospital spending from 1997 to 2001 is directly related to increased patient demand for care.² This increased utilization can be attributed to many factors, including an aging population that requires more advanced care with greater frequency—a problem likely to worsen over time as the baby boomer generation ages. According to U.S. Census Bureau estimates, in 2019, when the last of the baby boomers reach age 55, nearly 29 percent of the total U.S. population will be age 55 or older, compared with 21.6 percent in 2002.

A lack of effective care management and patient education also bolster utilization. Health benefits have become less restrictive in recent years, allowing patients to potentially overuse health services.

In addition, new and more expensive technologies also provide patients with a multitude of treatment options not previously available. For example, newly available drug-coated stents for heart attack patients may reduce the need for extensive open-heart surgery and decrease the risks and recovery periods. However, they cost nearly triple the uncoated stents and draw in less reimbursement. Hospitals are forced to balance the benefits of life-saving technologies for one category of patients with the challenges of maintaining services and keeping their doors open for the entire community.

Technology plays a large role in increased hospital costs. The costs of new medical equipment and technology, pharmaceuticals and other supplies accounted for 24.1 percent of the increase in spending on hospital care between 1997 and 2001.

Labor costs are another major driver in the rise in hospital costs as well. The continuing workforce shortage has prompted many hospitals to increase salaries and benefits of the most sought-after hospital employees to keep their workforce in tact. Labor costs totaled 38.8 percent of the increase of that same five-year time period.

A related concern is the steep rise in private health insurance premiums, which rose 13.9 percent between the spring of 2002 and spring of 2003.³ This represents the third consecutive year of double-digit increases, according to the 2003 Annual Employer Health Benefits Survey.

With average annual individual coverage premiums at $3,383 and family coverage premiums at $9,068 in 2002, many employers are turning to employees to share the burden of their premiums, in some cases causing some employees to go with less or without insurance altogether out of financial necessity. Many uninsured or underinsured patients turn to hospital emergency rooms for routine care that can be provided at a much lower cost in other settings. With the estimated number of uninsured Americans jumping to 43.6 million this year, the premium increases can only add to the predicament. Another problem is procrastination—patients who do not seek treatment for minor problems until they have progressed to chronic, and costly, health conditions.

Important to note is the $15 billion in savings between 1997 and 2001, attributed to improvements in hospital efficiency, which offset spending by 18.3 percent. The savings are due to reduced length of stay, decreased inpatient capacity, increased productivity and reduced administrative costs.

Further methods to stop the runaway health care spending train include better management of health care utilization and benefits. Also important is improved patient education on using health benefits appropriately for optimum health.