Our Thoughts on Hospital Inflation

The response to our hospital inflation projections continues to be overwhelming. We now have more than 800 registrants. Because so many hospitals are relying upon our hospital inflation data in order to establish credible budgets and conduct other financial planning, it is prudent to provide additional explanation regarding our data.

Inflation of hospital expenses represents the actual/projections from the Producer Price Index (PPI), Consumer Price Index (Urban) (CPI-U) and CMS data as presented by DRI-WEFA, an economic forecasting firm.

However, as we look to the future, we must respectfully disagree with the CMS projections. As the economy heats up, as healthcare demand and technology continue to grow, and as the baby boomers reach into their late 50's and early 60's, we see a tremendous push towards higher inflation.

A feature of note is the net operating revenue increase due to prices as measured by the PPI. It is an interesting fact that up until 2002 there was a shortfall between price increases and cost inflation. Projections show continued excess of revenue prices versus cost inflation. Obviously, projections are just that—informed opinions. Unfortunately, the tide can and will move back and forth. Remember that in election years the government tries very hard not to rock too many boats.

Another important feature is the total hospital revenue that includes technological and volume increases. These figures are derived from the CMS Office of the Actuary-National Healthcare Expenditures. With hospital expenditures (total revenues) now well over the half a trillion dollar mark, those dollars are looming larger and larger on the national radar screen.

We would appreciate any comments, both positive and negative, regarding our projections.

About the Indices
Past inflation figures were derived primarily by utilizing CMS data, which is based on BLS Producer Price Indexes (PPI), Consumer Price Indexes (CPI) and Employer Cost Indexes (ECI).

Weights of expense categories were obtained through the use of the CMS HCRIS File, (100 percent sample) as well as CMS annual weighting factors.

Projections are based on past history, group surveys and trend analysis.

The weighting factors are standard and should be modified for each individual hospital.

Also it should be noted that inflation only measures the increase in the price paid for the same item from one year to another. Hospital budgets must also reflect volume and technology increases (i.e., new drugs being introduced to the market).

Our measurement is valuable each quarter for those hospitals whose fiscal years end in that quarter. For example, if your fiscal year begins on 10/1/06, you can use the 3rd quarter figures of 2007 to determine your inflation factor. Although our projections are revised each quarter, they are yearly, not quarterly, projections.

Please let us know if you have any questions or suggestions.

Arnold Silver
Chairman
RC Healthcare Management Services, Inc.
602-995-9420
admin@rcmgmt.com