Tracking Health Care Costs

Originally published by the Center for Studying Health System Change (HSC). HSC was a nonpartisan policy research organization funded principally by the Robert Wood Johnson Foundation.

Tracking Health Care Costs: Hospital Spending Spurs Double-Digit Increase in 2001

Data Bulletin No. 22 | September 2002

This Data Bulletin from HSC examined the factors behind the return to double-digit growth in health care spending for the under-65 population in 2001. After several years of moderate increases during the managed care era, per capita health spending for the nonelderly population surged, driven primarily by accelerating hospital expenditures. The analysis decomposed the overall spending trend into contributions from specific service categories to identify which areas were growing fastest and why.

Hospital Spending Drives the Increase

Hospital spending was the single largest contributor to the acceleration in health care costs. Several factors combined to push hospital expenditures sharply higher: the retreat from tightly managed care loosened restrictions on hospital admissions and lengths of stay, wage pressures from the nursing shortage drove up labor costs, hospitals gained bargaining leverage over health plans through consolidation, and investment in new technology and facilities continued. The hospital building boom occurring in many markets raised additional concerns about a return to the medical arms race of the 1980s.

Other Cost Drivers

Prescription drug spending continued to grow rapidly, though the rate of increase was beginning to moderate as three-tier copayment structures became more widespread and major drugs neared patent expiration. Physician spending also rose, reflecting both higher payment rates negotiated by some provider groups and increased service utilization as managed care restrictions loosened. The overall trend raised questions about the sustainability of the health care cost trajectory and the adequacy of employer and consumer responses to contain spending growth.

The return to double-digit cost growth had significant consequences for employers and workers. Employers faced difficult decisions about whether to absorb higher premiums, shift more costs to employees, or reduce the generosity of benefits. Workers confronted rising out-of-pocket costs and the potential erosion of employer-sponsored coverage as small firms reconsidered whether to offer health insurance at all.

Sources and Further Reading

Kaiser Family Foundation -- Employer Health Benefits Survey -- Annual data on employer-sponsored health insurance.

Health Affairs -- Peer-reviewed health policy research.

Robert Wood Johnson Foundation -- Health policy research and programs.