Katie Adams , 2025-05-04 17:20:00
As hospitals brace for rising costs tied to President Donald Trump’s proposed tariffs, a new report from the American Hospital Association reveals that drugs and supplies are just part of the problem.
Overall, hospital expenses are climbing steadily — driven by chronic underpayments from payers, growing administrative requirements and increasing labor costs. Below are three key details from the AHA’s report.
Underpayments from Medicare and Medicaid are totaling hundreds of billions of dollars per year.
The provision of care is getting costlier for hospitals as the U.S. population gets older and more patients are coming in with severe health issues. This challenge is exacerbated by the fact that a growing number of these patients are insured through Medicare or Medicaid — which typically pay hospitals less than what it actually costs to treat someone.
In 2022, Medicare and Medicaid paid hospitals $130 billion less than what it actually cost to provide the care. Medicare only reimbursed hospitals 82 cents for every dollar spent on patient care, leading to a $100 billion loss just from Medicare, the report said.
Over time, these shortfalls have added up. In the second half of the 2010s, underpayments from Medicare and Medicaid reached more than $500 billion, which is 40% more than in the first half of the decade — even after accounting for inflation.
Hospitals don’t get reimbursed for the tens of billions of dollars they spend each year fighting wrongful claims denials.
Hospitals are facing rising administrative costs largely due to burdensome practices by commercial insurers, including Medicare Advantage and Medicaid managed care plans. While premiums rose twice as fast as hospital prices in 2023, commercial insurers have added strain through automated claim denials and excessive prior authorization demands.
Researchers estimate that hospitals spend $10 billion per year solely on handling prior authorizations, as well as another $20 billion appealing claims denials — over half of which are for care that should’ve been approved in the first place, according to the report.
In 2023, MA plan denials jumped nearly 56%, with many of these ending up overturned later. But even when coverage denials are overturned, hospitals aren’t reimbursed for the time and cost spent fighting them.
Labor costs make up 60% of hospitals’ total expenses.
Wages and benefits for hospital workers have grown much faster than general inflation over the past decade, the report said.
Hospital labor costs rose by more than $42.5 billion from 2021 to 2023, reaching $839 billion — which is nearly 60% of hospitals’ total expenses. In 2023 alone, hospitals spent $51.1 billion on expensive contract staff to cover workforce shortages, especially in rural areas.
Contract labor spending has declined since the pandemic peak, but it remains high and continues to strain hospital budgets. It’s also important to remember that labor costs are highly sensitive to staffing shortages, the report noted.
Photo: JamesBrey, Getty Images
