Hospital expenses have surged and remain high

In 2024, total hospital expenses grew by 5.1%, significantly higher than the overall inflation rate of 2.9%. Although expense growth has begun to slow, it is still elevated in several areas, including those impacted by labor and supply chain pressures.

Currently, labor makes up the largest portion of hospitals' expenses at 56%. As hospitals struggle with ongoing workforce shortages, many are offering competitive wages to recruit and retain their staff. Based on an analysis of Lightcast data, AHA found that advertised RN salaries have grown 26.6% faster than the rate of inflation over the last four years.

According to AHA, persistent growth in expenses has impacted hospitals' solvency and made it more difficult for them to provide comprehensive services in their communities.

Over the last two years, the average age of plant, which measures the age of hospital infrastructure, has increased by over 10%. This suggests that hospitals may be unable to reinvest in critical physical assets, such as medical equipment, operating rooms, and facility upgrades. Delaying capital improvements can jeopardize care quality as well as make it harder for hospitals to keep up with changing healthcare standards and technology.

Reimbursement isn't keeping up with the cost of care

According to the report, growing utilization and increased acuity, particularly among patients with chronic illnesses, have contributed to rising hospital costs. 

For example, data from the Institute of Health Metrics and Evaluation showed that ED visits for heart failure increased by 126.7% per capita between 2010 and 2019 while associated spending increased by 177.2%. Similar patterns have also been observed for type 2 diabetes and acute renal failure.

At the same time, longer observation stays from Medicare Advantage (MA) patients have also increased costs, particularly since observation stays may be reimbursed at lower rates or not at all. In 2024, MA patients had 36.9% longer observation stays compared to traditional Medicare patients, up from 28.6% in 2019.

Between 2022 and 2024, general inflation increased by 14.1% while Medicare net inpatient payment rates only increased by 5.1%. According to AHA, the decline in payment value due to inflation has led to $8.4 billion in lost revenue. In 2023 alone, Medicare and Medicaid underpaid hospitals by $130 billion, and underpayments grew an average of 14% annually between 2019 and 2023. 

Tariffs could have a significant impact on hospital costs

Currently, many essential medical goods, including medical devices, protective equipment, and medications, used in the United States come from international sources. For example, 70% of medical devices marketed in the United States are manufactured exclusively overseas, and over 90% of generic sterile injectable drugs depend on key starter materials from either China or India.

Potential tariffs on medical supplies and pharmaceuticals could lead to higher costs for hospitals, as well as supply chain disruptions.

According to a recent survey from Black Book Market Research, 82% of healthcare industry experts said they expect hospital costs to increase by at least 15% over the next six months due to higher import expenses. In addition, 90% of supply chain professionals said they expect major disruptions to procurement processes and contract negotiations due to higher costs and pricing volatility.

"This report should serve as an alarm bell that a perfect storm of rising costs, inadequate reimbursement, and certain corporate insurer practices are jeopardizing the ability of hospitals to deliver high-quality, timely care to their communities," said AHA president and CEO Rick Pollack. "With so much at stake, policymakers must recommit to making preserving access to hospital care a national priority."