Theories of Hospital Inflation: Some Empirical Evidence

This article examines three alternative hypotheses of hospital inflation: the demand-pull hypothesis, and cost-plus reimbursement hypothesis, and the labor cost-push hypothesis. The theoretical foundation of the cost-reimbursement hypothesis is explored; hospitals desiring to maximize quantity of hospital services or profits will not respond to cost-plus reimbursement by raising costs unless nearly all patients are covered by the plan. Empirical estimation of hospital average costs and average hospital wage rates yield no support for the cost-reimbursement hypothesis. A significant upward shift in hospital costs and hospital wages in the Medicare period, however, was obtained.