Tracking Health Care Costs:

Originally published as Data Bulletin No. 20 by the Center for Studying Health System Change (HSC), November 2000. HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

An Upswing in Premiums and Costs Underlying Health Insurance

The period of remarkably low health insurance premium growth that employers, governments, and consumers enjoyed through much of the 1990s came to an abrupt end by the year 2000. Between 1994 and 1998, premiums had risen an average of just 2 percent annually. By 2000, that figure had jumped to 8.3 percent. This dramatic acceleration stemmed from two converging forces: rapidly growing costs beneath the surface of insurance premiums and a sharper upward swing tied to the health insurance underwriting cycle.

Fully insured plans bore the brunt of the increase, with premiums climbing 9.6 percent in 2000 compared to 7.1 percent for self-insured arrangements. This widening gap gave employers added motivation to self-insure and to move away from plan types most commonly offered on a fully insured basis, particularly health maintenance organizations (HMOs). Between 1999 and 2000, the share of employees working for self-insured firms grew from 48 percent to 51 percent.

Premium Growth by Year: Large Firms vs. All Firms

Premium increases for large firms (200 or more workers) tracked by Kaiser/HRET and KPMG surveys showed a clear trajectory: from double-digit growth in 1991 (11.5%) and 1992 (10.9%), premiums fell sharply through 1996, when large-firm increases reached a low of just 0.5 percent. The rebound began in 1997 at 2.1 percent, accelerated to 3.3 percent by 1998, then 4.1 percent in 1999, and hit 7.5 percent in 2000. When all firms were included, the 2000 increase was even steeper at 8.3 percent. Underlying health care spending, measured by the Milliman & Robertson Health Cost Index, followed a parallel but somewhat different pattern, dipping to 2.0 percent growth in 1996 before climbing back to 6.6 percent in 1999 and an estimated 6.5 percent through March 2000.

What Was Driving Costs Higher

The trajectory of costs beneath private health insurance premiums has historically shaped premium trends over time. These underlying expenditures rose 6.6 percent in 1999, a sharp departure from the average annual growth of just 2.4 percent recorded between 1993 and 1997. The 1999 pattern mirrored earlier years in that drug spending and hospital outpatient costs surged while hospital inpatient spending remained flat or negative.

Prescription drug spending was the single largest contributor, responsible for 44 percent of the 1999 cost increase. Roughly one-third of drug spending growth came from higher prices, with the remainder attributable to newly introduced medications and greater utilization of existing ones. Hospital outpatient services contributed 21 percent of the increase, maintaining consistently high growth rates throughout the decade with per capita cost increases averaging around 8.5 percent annually. Hospital inpatient spending, by contrast, accounted for only 3 percent of the total increase, continuing a half-decade pattern in which per capita inpatient spending declined more often than it grew. Physician spending made up the remaining 32 percent of the cost increase. Physician cost growth had dipped during the mid-1990s, a period when physician fees paid by private insurers actually deflated, but by 1999 spending growth had nearly returned to levels seen at the start of the decade.

Expenditure Trends by Category, 1991-2000

Annual per capita changes in health care spending between 1991 and 2000 told a detailed story. Total benefit costs grew 6.9 percent in 1991 and gradually slowed to 2.0 percent in 1996 before rebounding to 6.6 percent in 1999. Hospital inpatient costs actually fell for five consecutive years (1994-1998), dropping as much as 5.3 percent in 1997, before turning slightly positive at 0.6 percent in 1999 and 1.0 percent through early 2000. Hospital outpatient spending held in the 7-to-9 percent range through the entire decade. Physician cost growth ranged from a low of 1.6 percent in 1996 to 5.9 percent in 1992 and stood at 5.2 percent in both 1999 and early 2000. Prescription drug spending accelerated dramatically, from 5.2 percent in 1994 to 18.4 percent in 1999 and an estimated 17.2 percent through March 2000.

What Rising Costs Meant for Consumers

For most of the 1990s, consumers were largely shielded from the cost increases taking place beneath the surface. Out-of-pocket spending on medical services and drugs actually declined during the decade, primarily because so many people shifted into managed care plans with richer benefit structures. But with the vast majority of Americans already enrolled in managed care by 2000, out-of-pocket costs were poised to start tracking premium trends more closely.

Through the late 1990s, employers absorbed much of the premium growth, especially for workers with single coverage. But an economic downturn threatened to reverse that pattern. If employers began passing more costs to workers, sharp increases in employee premium contributions could worsen an already growing problem: low-wage employees choosing not to enroll in plans they were eligible for, and subsequently joining the ranks of the uninsured. Prescription drugs stood out as the one area where consumers had already felt the squeeze. Rapid pharmaceutical spending growth had prompted many employers to raise copayments for brand-name medications not included on preferred formularies.

Outlook for Future Spending

Several forces pointed toward continued above-average spending growth going forward. The managed care backlash had prompted health plans to loosen restrictions, costly new medical technologies continued to reach the market, and provider consolidation was giving hospitals and physician groups greater bargaining power. Still, the massive double-digit premium increases of the late 1980s and early 1990s were unlikely to return. Health care markets had grown more competitive, and sustained price pressure on providers was expected to drive continuing efficiency efforts on their part.

Sources and Further Reading

This Data Bulletin drew on data from the Milliman & Robertson Health Cost Index, which measures cost increases faced by private insurers; the Kaiser Family Foundation/Hospital Research and Education Trust survey of employer-based health plans for 1998-2000; and the KPMG survey of employer-based health plans for 1993-1998. It was adapted from "Tracking Health Care Costs: Inflation Is Back," by Christopher Hogan, Paul B. Ginsburg, and Jon Gabel, published in Health Affairs, Vol. 19, No. 6 (November/December 2000).