Tracking Health Care Costs: Hospital Care Key Cost Driver in 2000

Data Bulletin No. 21 (Revised), September 2001 — By Bradley C. Strunk, Paul B. Ginsburg, and Jon R. Gabel

Hospital spending was the single largest contributor to rising medical costs in 2000, accounting for 43 percent of the overall increase. Health care spending growth per privately insured person climbed 7.2 percent that year — the steepest year-over-year jump since 1990. With underlying medical costs accelerating, insurance premiums surging into double digits, and the economy losing momentum, the combination threatened to push consumers' out-of-pocket expenses higher and swell the ranks of the uninsured.

Underlying Cost Trends

The year 2000 brought notable shifts in the components driving health care spending, with hospital services leading the way.

Outpatient care spending rose 11.2 percent in 2000, the largest increase since 1992, and accounted for 31 percent of overall cost growth. Inpatient care spending increased 2.8 percent, representing 12 percent of the total increase. That inpatient figure marked a sharp departure from the period between 1994 and 1998, when spending on inpatient services actually declined year over year, falling by as much as 5.3 percent at one point.

Several forces pushed hospital costs higher. Consumer demand for broad networks of hospitals and physicians, combined with the pullback from tightly managed care, strengthened many hospitals' negotiating position with health plans. Hospital consolidation and the reduction of excess capacity further bolstered providers' bargaining leverage. The result was a growing number of contract showdowns between providers and health plans, with hospitals using their increased clout to secure higher payment rates.

Health care payroll growth was another significant driver. Payroll costs across all health services rose 4.7 percent in 2000, up from 3.1 percent in 1999, while hospital-specific payroll costs climbed 3.7 percent versus 2.6 percent the prior year. Much of the higher payroll growth in 2000 reflected increased hours worked rather than faster-rising wages. However, during the first five months of 2001, average hourly wages began accelerating sharply — particularly at hospitals — likely reflecting nursing shortages and difficulty filling other clinical positions.

Other significant cost trends in 2000 included:

Prescription drug spending growth, while still very high, decelerated to 14.5 percent in 2000, accounting for 29 percent of the overall cost increase. Two factors were likely responsible for the slowdown: a scarcity of new blockbuster drug launches and growing employer adoption of three-tier pharmacy benefit designs, which shifted more cost to consumers choosing brand-name medications over generics.

Physician services spending growth moderated to 4.8 percent, representing 28 percent of total cost growth for the year.

Implications for Consumers

In 2001, premiums for employer-based health insurance rose 11 percent — the fifth consecutive year of premium increases and the highest jump since 1993.

The wide gap between the 2001 premium increase and the 2000 underlying cost increase — 11 percent compared with 7.2 percent — reflected two overlapping dynamics: expectations of still-higher costs ahead, and the health insurance underwriting cycle, in which premium trends diverge from projected costs. Expectations of continued cost escalation were visible in the 9.5 percent premium increase for self-insured plans in 2001. The underwriting cycle manifested in the even higher 12.3 percent premium increase for fully insured plans, as insurers demonstrated a willingness to sacrifice market share in order to rebuild profit margins.

For several years, insured consumers had been partially shielded from rising costs because employers absorbed a disproportionate share of premium increases. In 2001, the employee share of premiums held steady at 15 percent for single coverage and 27 percent for family coverage. But as the economy weakened, this cushion was likely to erode. Employers had already begun increasing patient cost sharing for pharmaceuticals and were expected to do the same for hospital and physician services.

Unlike the early 1990s, the last time cost trends ran this high, the cost-containment tools of managed care were now in retreat. Consumers and providers had pushed back against tight oversight and restricted networks, leaving few mechanisms in place to slow the rising cost trajectory. The combination of faster cost growth, a softening economy, and limited cost-containment options created a volatile environment that could lead to higher out-of-pocket burdens for consumers and an increase in the number of uninsured Americans.

Data Sources and Methodology

This Data Bulletin drew on the Milliman USA Health Cost Index ($0 deductible), which was designed to reflect claims increases experienced by private insurers. Additional data came from the Kaiser Family Foundation/Health Research and Educational Trust survey of employer-based health plans for 1999-2001, the KPMG survey of employer-based plans for 1991-98, and the U.S. Bureau of Labor Statistics Employment, Hours and Earnings series for tracking payroll costs. The bulletin also incorporated findings from the Center for Studying Health System Change's 2000-01 site visits. The bulletin was adapted from "Tracking Health Care Costs," by Bradley C. Strunk, Paul B. Ginsburg, and Jon R. Gabel, published as a web-exclusive in Health Affairs on September 26, 2001.

Sources and Further Reading

1. Strunk, Bradley C., Paul B. Ginsburg, and Jon R. Gabel, "Tracking Health Care Costs," Health Affairs, Web-exclusive publication (September 26, 2001).
2. Milliman USA Health Cost Index ($0 deductible) — data reflecting claims increases for private insurers.
3. Kaiser Family Foundation/Health Research and Educational Trust, Survey of Employer-Based Health Plans (1999-2001).
4. KPMG Survey of Employer-Based Plans (1991-1998).
5. U.S. Bureau of Labor Statistics, Employment, Hours and Earnings series.
6. Center for Studying Health System Change, 2000-01 Community Site Visits.