Trends in total hospital financial performance under the prospective payment system

Health Care Financing Review, Spring, 1992 by Charles R. Fisher

Over the entire study period, 1977 through 1989, hospital revenues rose at an average annual rate of 2.9 percent faster than the GNP (Table 13 and Figure 3). Hospital spending trends in Table 13 include personal health care consumption spending but exclude hospital investments in construction and equipment (not shown in this article). To the extent that hospital investment rate changes differ from hospital consumption rate changes, the ratio of change in hospital spending to changes in the GNP will vary. The preliminary estimate is that changes in hospital investment spending rates do not differ markedly from changes in hospital consumption rates shown in Table 13.

I previously showed how hospital output prices could be derived directly from list prices. Total hospital output prices can also be considered as the product of input prices, productivity rates, and profit rates. This relationship is shown in the identity: [TABULAR DATA OMITTED]

Hospital output prices = Total net revenues/Outputs = (Inputs/Outputs) x (Expenses/Inputs) x (Total net revenues/Expenses)

The identity shows that a 1-percent increase in input prices translates directly into a 1-percent increase in output prices, unless changes in productivity rates or profit rates offset or supplement the input price increase. During the study period, the major determinant of rising output prices was rising input prices (Table 14). The major determinant of rising input prices in the period was hospital labor compensation (Table 8).

The impact of rising hospital compensation rates can be observed in the growing differences in real wage rate changes in the hospital sector compared with the general economy. Over the 12-year study period, 1977 through 1989, real hospital wages (i.e., nominal hospital wages divided by the CPI for all items) rose more than 20 percent, while real private non-agricultural wages declined nearly 10 percent (Table 7 and Figure 2). Victor Fuchs reports that "From 1977 to 1987, wages in most industries failed to keep pace with inflation, but rank-and-file health workers did better, outpacing employees in the rest of the economy by 1.3% per annum," and that "In 1949, rank-and-file health care workers (16 years of schooling or less) earned 15% less than their counterparts in the rest of the economy. In 1985 they earned 7% more than other workers [which] implies that relative wages rose at the rate of 0.6% per annum" (Fuchs, 1990).

Data sources and limitations

Hospital data for Tables 1 through 14 were obtained from Hospital Statistics, an annual publication of the American Hospital Association. Data are shown for all community hospitals in the United States from this source except for hospitals in the States of Maryland, Massachusetts, New Jersey, and New York.

Data for Tables 15 through 19 were obtained from a linked file of Medicare Cost Reports for 5,161 providers for cost report years 1985 through 1989.

Data from Medicare Cost Reports and AHA annual surveys are reported for provider reporting periods, which generally do not coincide with Federal FY periods. Thus, the characterization of hospital-related [TABULAR DATA OMITTED]